10-year Treasury bonds have a coupon rate of 2.2 % and par value of $1000. The...

Question

Question

10-year Treasury bonds have a coupon rate of 2.2 % and par value of $1000. The selling price is $ 970.

1A. Calculate and explain how much in dollars you will receive in cash on an annual basis.

1B. Calculate total dollar income during the 10 years of investing and holding of this bond.

1C. Calculate your final wealth in dollars.

Answer 1

Answer #1

1A) cash received on annual basis = Par value * coupon rate = $1000*2.2% = $22 This is interest is paid on Par value, though it was sold on discount.

1B) total dollar income during 10 years = coupon income + capital income ie. discount = ($22 * 10) + ($1000-$970) = $250

1C) final wealth in dollars = coupon income + par value capital receipt = $220 + $1000 = $1220

Answer 2

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