The U.S.government will pay SB Amos $2,500,000 each six months, equal to 2.5% of the $100 million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will repay the $100 million at the end of five years.Assume that at the time SB Amos purchases the bonds, the market prices these bonds to yield SB Amos 6% annually (3% each six months).The bonds are classified as held to maturity.SB Amos will pay an amount equal to _____ for the bonds.

Question

Quizplus · Accepted Answer

The correct amount SB Amos will pay for the bonds is determined by calculating the present value of the bond's cash flows (interest payments and principal repayment) at the market yield rate of 6% annually (3% each six months). Given the bond's 5% annual coupon rate, paid semi-annually, SB Amos will receive $2,500,000 every six months for 10 periods (5 years), and a $100,000,000 principal repayment at the end of the 5 years. The present value of these cash flows at a 3% semi-annual discount rate results in the amount closest to option A, $95,734,898.

The USGovernment Will Pay SB Amos $2,500,000 Each Six Months, Equal