The following table shows the prices of a sample of Treasury strips. Each strip
ID: 2713841 • Letter: T
Question
The following table shows the prices of a sample of Treasury strips. Each strip makes a single payment at maturity. Calculate the interest rate offered by each of these strips.
Years to Maturity Price, %
1 97.652%
2 94.151
3 90.344
4 86.280
a. What is the 1-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Interest rate %
b. What is the 4-year rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Interest rate %
c. Is the yield curve upward-sloping, downward-sloping, or flat? Upward-sloping Downward-sloping Flat
d. Is this the usual shape of the yield curve? Yes No
Explanation / Answer
1.FV 100
Price 97.652
1 year interest rate is 2.4045%
2.FV 100
Price 86.28
4 year interest rate is 3.76%.
3.The yield is upward sloping as the prices are going down, yield and prices are inversely propitional to each other.
4.Yes , Greater the maturity higher the yield, lower the matutity less is the yield.
As bond comes close to its maturity its yield reduces.