Question

​You own a 10-year, $10,000 US Treasury bond with a coupon rate of 3%. There are two years left to maturity, and you are planning to sell the bond in the secondary market. If the interest rate is 5%, how much can you expect to get for the bond?

Answer 1

Answer:

$9,627.82 is expected to receive from the bond.

Explanation:

Given:

Face value of bond = $10,000

Coupon rate = 3% or 0.03 (assuming it is paid annually)

Coupon payment = 0.03 × 10,000 = $300

Interest rate is 5% or 0.05.

Amount expected to receive on the bond is the present value of bond.

Time to maturity = 2 years

Present value of bond = 10,000 × $PVIF_({2 years, 0.05})$ + 300 × $PVIFA_({2 years, 0.05})$

= 10,000 × 0.907 + (300 × 1.8594)

= $9,627.82

Therefore, bond is expected to receive $9,627.82 from the sales.