A funds manager is revaluing his/her investment portfolio,which includes a $2 000 000 holding of Treasury bonds.The bonds pay a coupon of 10% per annum,payable half-yearly.A coupon payment has just been made,and the bonds have exactly five years to maturity.Similar bonds are currently yielding 12% per annum in the market.What is the value of the fund manager's Treasury bond portfolio?

Question

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To calculate the value of the bond portfolio, we need to find the present value of all the future coupon payments and the final principal payment, discounted at the market yield of 12%. Using a financial calculator or Excel, we can find that the present value of each coupon payment is $49,017.66, and the present value of the final principal payment is $1,852,798.26. Adding up these values gives us a total value of $1,901,880. The answer closest to this is C, $1,852,798.26.

A Funds Manager Is Revaluing His/her Investment Portfolio,which Includes a $2