What would you be willing to pay for one patriot bond

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Reference no: EM131886579

The U.S. Treasury just announced that it will issue new "Patriot" bonds. These bonds will make a single interest payment in one year of $50 (or 5%). When the bonds mature (in one year), they will make a cash payment equal to the value of the S&P500 index at that time minus 1,000 (e.g., if the S&P index is at 1,200, you receive $200, but if the value of the index is 800, you owe the Treasury $200). You can assume a flat yield-curve at 5% and a dividend yield on the S&P of 2%. Suppose that the current level of the S&P500 is 970.87. What would you be willing to pay for one Patriot bond?

Reference no: EM131886579

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