Question

What is the present value (PV) of a firm’s investment in $ 1 million U.S. Treasury Bonds yielding 5%, with a coupon rate also of 5%, and maturing in 30 years. What is the present value (PV) and net present value (NPV) of these bonds?   The firms assets earn 15% (ROA), the S&P 500 is expected to earn 12%, and treasury bills yield 3%. (Hint: What is the opportunity cost of capital? Ignore taxes.)

Answer 1

1)

a)

Here no need of any calculations;

here the bond yield = coupon rate = 5%

when bond yield = coupon rate then the present value of the bond is equal to its face value 1 million

hence the present value of the bonds are 1 million.

b)

coupon rate amount is the cash flows

Here coupon rate = 5% = 0.05 * 1 million = 50,000

In the financial calculator

Press CF then Press 2nd then press CLR Work

Now input the values

CFO = -1000000 , Press enter and then press down arrow

Note CF0 is negetive as it is an outlay

CF1 = 50,000 , Press enter and then press down arrow

F01 = 30 , Press enter

Now Press NPV

Input I = 5 Press enter and then press down arrow

NPV gets reflected

Now press CPT

We get NPV as -231,377.44