Macroeconomics + Economy 2009 Update 18th Edition by Campbell McConnell, Sean Masaki Flynn,Stanley Brue

Exercise 10

CALCULATING PRESENT VALUES USING CURRENT INTEREST RATES To see the current interest rates ("yields") on bonds issued by the U.S. government, please go to www.bloomberg.com/markets/rates/index.html and scroll down to the section labeled U.S. Treasuries. By tradition, U.S. government bonds with maturities of less than 1 year are called bills, while those with longer maturities are referred to as either notes or bonds. The notes have maturities of 1 to 10 years, while the bonds have maturities exceeding 10 years. What are the current yields on 2-year notes and 30-year bonds Use the current yield for the 2-year note to calculate the present value of an investment that will make a single payment of $95,000 in 2 years. Use the current yield on the 30-year bond to calculate the present value of an investment that will make a single payment of $95,000 in 30 years. To assist your computations, use the present value calculator located under Investment Calculators at www.timevalue.com/tools.html. Why the large difference in present values in the two situations