Hello folks! I need some help.
I have a $100,000 US treasury savings bond which matures in 2025(consider it 7 years exactly). It pays interest semi-annually as follows:
Year 1 @ 1.50%(half of it every 6 months)
Year 2 @ 1.75%
Year 3 @ 2.25%
Year 4, 5, 6 @ 3%
Year 7 @ 4%. If I sold in the Open Market @ a yield of 3.5% semi-annually, what price should I get for it? Any help would be appreciated. I thank you.
You could find out the price by summing up the PV of all the coupons plus the face value of the bond at maturity at the given yield of 3.5% compounded semi-annually. This is a cash flow problem and you would use the following formula:
PV = FV x [1 + R]^-N
PV =750 x [ + 0.035/2]^-1 + 750 x [1 + 0.035/2]^-2 + 875 x [1 + 0.035/2]^-3 +........and so on to + 100,000 x [1 + 0.035/2]^-14......and you should get = $94,391.03.
I have NOT included any accrued interest that may be due, because I used the term of 7 years exactly, or 14 semi-annual periods.
