Question

You have just purchased a three-month, $560,000 negotiable CD, which will pay a 9.5 percent annual interest rate.

a. If the market rate on the CD rises to 10 percent, what is its current market value?
b. If the market rate on the CD falls to 9.25 percent, what is its current market value?

Answer 1

Current price of CD is the present value of cash flow from CD.
a.	Current Price		$ 5,46,341.46
Working:
a.Present value of 1			=	(1+i)^-n		Where,
			=	(1+0.025)^-1		i	10%*3/12	=	0.025
			=	0.97561
b.Present value of cash flow from bond				=	$ 5,60,000.00	x	0.975609756
				=	$ 5,46,341.46
b.	Current Price		$ 5,47,342.70
Working:
a.Present value of 1			=	(1+i)^-n		Where,
			=	(1+0.023125)^-1		i	9.25%*3/12	=	0.023125
			=	0.977398
b.Present value of cash flow from bond				=	$ 5,60,000.00	x	0.977397679
				=	$ 5,47,342.70