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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

FUTURES What is the implied nominal interest rate on a 10-year U.S. T-notes ($100,000) futures contract that settled at 100’16.0 (or 100–160)? If interest rates increased by 1%, what would be the contract’s new value?

Summary Introduction

To determine: The implied nominal interest rate and new value of the contract.

Explanation

Given information:

A Country U’s Treasury notes of $100,000 for 10-years where a future contract is formed to settle at 100-160. The interest rates increased by 1 percent.

Compute the implied nominal interest rate and new value of the contract:

The future contract settled at 10016/32% that means 100 plus (1632%) of the value of Treasury note that is $100,500(1.005×$100,000$1,000×100). The number of bonds issued is 100 based on assumption. Now, determine the implied nominal interest rate (rd) using the following equation by a financial calculator:

rd=t=120Present value of treasury note

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