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Chapter 6 Valuing Bonds 1 6 9 6 . 1 Self - Test The following table shows a small sample of prices of Treasury bonds
Chapter Valuing Bonds
SelfTest
The following table shows a small sample of prices of Treasury bonds in :
tableCoupon Maturity,Price, of face valueApril February November
a How much would you need to pay to buy the bond maturing in
b How much interest would you receive each year if you own the bond maturing in
c What payment would you receive when the bond matures in
$
Did you notice that your bond is like a package of two investments? The first provides a level stream of coupon payments of $ a year for each of four years. The second consists of the final repayment of the $ face value. Therefore, you can use the annuity formula to value the coupon payments and then add on the present value of the inal payment of face value:
coupons face value
coupon annuity factor face value discount factor
$$
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