1. A 5 year US Treasury note with a face value of $10,000 is selling on the mark
ID: 2818708 • Letter: 1
Question
1. A 5 year US Treasury note with a face value of $10,000 is selling on the market for $9,472.00. It has 2 years of maturity. Calculate the note's yield to maturity. (no coupon payments).
2. A bond with a $1,000 par value has a 7.35% annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 7.15%. What should the current price be; Is this a discount or premium bond.
3. A bond with a $1,000 par value has a 7.35% annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 7.65%. What should the current price be; Is this a discount or premium bond.
Explanation / Answer
Answer to Question 1:
Face Value = $10,000.00
Current Price = $9,472.00
Time to Maturity = 2 years
Semiannual Period to Maturity = 4
Let semiannual YTM be i%
$9,472.00 = $10,000 * PVIF(i%, 4)
$9,472 = $10,000 / (1 + i)^4
(1 + i)^4 = 1.05574
1 + i = 1.01365
i = 0.01365 or 1.365%
Semiannual YTM = 1.365%
Annual YTM = 2 * 1.365%
Annual YTM = 2.73%
So, yield to maturity on note is 2.73%