Ten years ago Franky Frugal bought some 20-year treasury bonds for $200,000. The bonds will pay $4200 per year for 20 years, and at the end of 20 years he will receive his last payment plus his original $200,000 back. Unfortunately Franky's wife is really ill, and he needs all of the money he can get to pay his bills. hE decides to sell his bond. The current rate on a 10-year T-bond is 6.93% per year.What is the current value of his bonds? $
Solution:
The 20-year bond was purchased 10 year ago. Therefore it will mature in (20 - 10) = 10 years. Current value of bond would be
Current value = -200,000 + $4,200 (PVIFA @ 6.93%, 10) + $200,000 (PVIF @ 6.93%, 20)
Current value = -200,000 + $4,200 [(1.0693^10-1)/(0.0693*1.0693^10)] + $200,000 (1/1.0693^20)
Current value = -200,000 + 4,200 (7.04637) + 200,000 (0.26182)
Current value = -$118,040.56
Ten years ago Franky Frugal bought some 20-year treasury bonds for $200,000. The bonds will pay...
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