U.S. Treasury 30-Year Bonds – Accounting & Finance Assignment Help

Assignment Task

Task

Question 1.

In May 2020, the U.S. Treasury issued 30-year bonds with a coupon rate of 6.25%, paid semi-annually. A bond with a face value of $1,000 pays $31.25 (1,000 × 0.0625 / 2) every six months for the next 30 years; in May 2050, the bond also repays the principal amount, $1,000.

Answer the following questions and show all supporting calculations.

(a) What is the price of the bond at the time of issue in May 2020 assuming the 30-year interest rate is increased to 7.5% (nominal rate with semi-annual compounding)?

(b) What is the price of the bond at the time of issue in May 2020 assuming the 30-year interest rate is decreased to 5% (nominal rate with semi-annual compounding)?

(c) Show how the value of the bond changes as the interest rate changes (plot the value as a function of the interest rate). At what interest rate is the value of the bond equal to its face value of $1,000?

(d) Assume that the 30-year interest rate remains at 6.25% (nominal rate with semi-annual compounding) at the time of issue in May 2020.  If your required rate of return is 6.30?fective, will you buy the bond?

(e) Assume that the 30-year interest rate remains at 6.25% (nominal rate with semi-annual compounding) at the time of issue in May 2020.  Further, assume that you need to pay for a transaction cost of $15 per bond. If your required rate of return is 6.30?fective, will you buy the bond?

Q1  Notes: For a high mark for this question, I would expect you to present your solution logically and clearly.  
Your response must be typed properly in Word document. You need to explain your solution method (e.g. annuity, perpetuity, time-line  etc ),  the input parameters and  how you did the calculation (e.g. the Excel functions you use).
Your response should be concise.  There is no need to show your excel spreadsheet. 

Question 2

You work for a small pottery company that is considering selling products on the Internet. After careful analysis, you estimate that the firm would need to spend $80,000 developing a Web site and integrating it with the firm’s inventory system. For tax purposes, this investment can be depreciated using straight-line depreciation over 4 years (the salvage value is zero). The Web site will generate an additional $100,000 in sales. The costs of goods sold will equal $60,000. To support these sales, inventory will have to increase by $8,000 in the first year. Inventory will remain at this level until the end of the project in 4 years, at which time it will drop back to its original level. The tax rate is 30% and the after-tax cost of capital is 10%. Should the firm proceed with this project?

Q2 Notes: For a high mark for this question, I would expect you to present your solution logically and clearly.  
Your response must be typed properly in Word document. You need to explain your solution method (e.g. annuity, perpetuity, time-line  etc ),  the input parameters and  how you did the calculation (e.g. the Excel functions you use).
Your response should be concise.  There is no need to show your excel spreadsheet.