You have a 30-year Treasury of $1,000 face value that pays 5.5% coupons, which has 6 years left to maturity. What are the cash flows you will get if you buy this?
You have a 30-year Treasury of $1,000 face value that pays 5.5% coupons, which has 6 years left to maturity. What are the cash flows you will get if you buy this?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![The text presents a financial scenario involving a 30-year Treasury bond with a face value of $1,000. This bond offers a 5.5% annual coupon rate and has 6 years remaining until maturity. The question posed is: "What are the cash flows you will get if you buy this?"
To determine the cash flows, these steps need to be followed:
1. **Calculate the Annual Coupon Payment:**
The annual coupon payment can be calculated using the formula:
\[
\text{Annual Coupon Payment} = \text{Face Value} \times \text{Coupon Rate}
\]
For this bond:
\[
\$1,000 \times 0.055 = \$55
\]
2. **Determine the Total Cash Flows:**
Since the bond has 6 years left to maturity, you will receive 6 annual coupon payments of $55.
3. **Final Maturity Payment:**
At the end of the 6-year period, you will also receive the face value of the bond, which is $1,000.
**Summary of Cash Flows:**
- Annual Cash Flow for 6 years: $55
- Final Cash Flow at Maturity (Year 6): $1,000 + $55 = $1,055
In conclusion, if you purchase this bond, your annual cash flow will be $55 for the next 6 years, and at the end of the 6th year, you will receive the final $1,055 (the last coupon payment plus the face value of the bond).](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa0a6d064-d60f-4f54-aa81-ca6ff52cfb9a%2F360adca5-b3dc-469a-9056-94ed930c3009%2Fcwr8zv1g_processed.png&w=3840&q=75)
Transcribed Image Text:The text presents a financial scenario involving a 30-year Treasury bond with a face value of $1,000. This bond offers a 5.5% annual coupon rate and has 6 years remaining until maturity. The question posed is: "What are the cash flows you will get if you buy this?"
To determine the cash flows, these steps need to be followed:
1. **Calculate the Annual Coupon Payment:**
The annual coupon payment can be calculated using the formula:
\[
\text{Annual Coupon Payment} = \text{Face Value} \times \text{Coupon Rate}
\]
For this bond:
\[
\$1,000 \times 0.055 = \$55
\]
2. **Determine the Total Cash Flows:**
Since the bond has 6 years left to maturity, you will receive 6 annual coupon payments of $55.
3. **Final Maturity Payment:**
At the end of the 6-year period, you will also receive the face value of the bond, which is $1,000.
**Summary of Cash Flows:**
- Annual Cash Flow for 6 years: $55
- Final Cash Flow at Maturity (Year 6): $1,000 + $55 = $1,055
In conclusion, if you purchase this bond, your annual cash flow will be $55 for the next 6 years, and at the end of the 6th year, you will receive the final $1,055 (the last coupon payment plus the face value of the bond).
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