The U. S. Treasury issued a 10-year bond on November 16, 1998, paying 6.47% interest. Thus, if you bought $600,000 worth of these bonds, you would receive $38,820 per year in interest for 10 years. At investor wishes to buy the rights to receive the interest on $600,000 worth of these bonds. The amount the investor is willing to pay is the present value of the interest payments, assuming a 6% rate of return. If we assume (incorrectly, but approximately)that the interest payments are made continuously, what will the investor pay?
A)$291,918.87
B)$2,919.19
C)$1,178,910.86
D)$270,713.02
E)$1,825,910.86

Question

Quizplus · Accepted Answer

The present value of continuous interest payments can be calculated using the formula for the present value of a continuous annuity: PV = C * (1 - e^(-rt)) / r, where C is the annual interest payment, r is the rate of return, and t is the time period. Plugging in the values: PV = $38,820 * (1 - e^(-0.06*10)) / 0.06 = $291,918.87.

The U S Treasury Issued a 10-Year Bond on November 16, 1998