Answer the questions below.
a.You buy a government bond that pays interest twice a year. The interest payment is $300 each six months. The bond matures in six years. The face value of the bond is $10,000. The annual market interest rate is 6 percent. What is the present value of the bond? Show your work. A formula that may be useful to you is: 
. b.After six months go by, you receive the first interest payment of $300. The annual market interest rate has declined to 5 percent and you decide to sell the bond. What is the bond's present value when you sell it? Show your work. c.What is your total return from owning the bond for six months (expressed at an annual rate, in percentage points, with two decimals)? Show your work.
What will be an ideal response?
| a. | $10,000; no calculation needed. |
| If you calculated the present value from the formula, you would need V = $10,000, F = $300, i = .06/2, and N = 12, so | |
 | |
| = 2,986.20 + 7,013.80 = $10,000. | |
| b. | Now, V = $10,000, F = $300, i = .05/2, and N = 11, so |
 | |
| = 2,854.26 + 7,621.45 = $10,475.71. | |
| c. | Your total return (at an annual rate) is 15.51 percent, which is derived from your interest of $300 + capital gains of $475.51 = total earnings of $775.51, divided by $10,000 = 7.755 percent, multiplied by 2 to put it at an annual rate = 15.51 percent. |
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