In May 2000, the U.S. Treasury issued 30-year bonds with a coupon rate of 6.25%, paid...

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In May 2000, the U.S. Treasury issued 30-year bonds with acoupon rate of 6.25%, paid semiannually. A bond with a face valueof $1,000 pays $31.25 (1,000 × 0.0625 / 2) every six months for thenext 30 years; in May 2030, the bond also repays the principalamount, $1,000.
(a) What is the value of the bond if, immediately after issue inMay 2000, the 30-year interest rate increases to 7.5%?
(b) What is the value of the bond if, immediately after issue inMay 2000, the 30-year interest rate decreases to 5.0%?
(c) On a graph in Excel, show how the value of the bond changesas the interest rate changes (plot the value as a function of theinterest rate). At what interest rate is the value of the bondequal to its face value of $1,000?

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3.9 Ratings (527 Votes)

aValue of the bond is calculated using the PV function in Excelwith these inputs rate 750 2 converting annual rate into semiannualratenper 30 2 30 years to See Answer

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In May 2000, the U.S. Treasury issued 30-year bonds with acoupon rate of 6.25%, paid semiannually. A bond with a face valueof $1,000 pays $31.25 (1,000 × 0.0625 / 2) every six months for thenext 30 years; in May 2030, the bond also repays the principalamount, $1,000.(a) What is the value of the bond if, immediately after issue inMay 2000, the 30-year interest rate increases to 7.5%?(b) What is the value of the bond if, immediately after issue inMay 2000, the 30-year interest rate decreases to 5.0%?(c) On a graph in Excel, show how the value of the bond changesas the interest rate changes (plot the value as a function of theinterest rate). At what interest rate is the value of the bondequal to its face value of $1,000?