1. Suppose it is November 2000 and we are considering a government bond. We see in The Wall Street Journal some 13s of November 2004. This is jargon that means the annual coupon rate is 13 percent.1 The face value is $1,000, implying that the yearly coupon is $130 (13% $1,000). Interest is paid each May and November, implying that the coupon every six months is $65 ($130/2). The face value will be paid out in November 2004, four years from now. By this we mean that the purchaser obtains claims to the following cash flows:

If the stated annual interest rate in the market is 10 percent per year, what is the present value of the bond?

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5/01 11/01 5/02 11/02 5/03 11/03 5/04 11/04 $65 $65 $65 $65 $65 $65 $65 $65 + $1,000