Please Explain in detail how you got the answer the correct answer is A Which of
ID: 2824011 • Letter: P
Question
Please Explain in detail how you got the answer the correct answer is A
Which of the following bonds would be cheapest to deliver given a T-note futures price of 79.2629? (Assume that all bonds have semiannual coupon payments based on a par value of $100.)
6.5-year bond with 4% coupons and a yield of 3.5%
7-year bond with 9% coupons and a yield of 10.5%
8.5-year bond with 4.5% coupons and a yield of 5.5%
6.5-year bond with 4% coupons and a yield of 3.5%
Please Explain in detail how you got the answer the correct answer is A
Which of the following bonds would be cheapest to deliver given a T-note futures price of 79.2629? (Assume that all bonds have semiannual coupon payments based on a par value of $100.)
Selected Answer: c.6.5-year bond with 4% coupons and a yield of 3.5%
Answers: a.7-year bond with 9% coupons and a yield of 10.5%
b.8.5-year bond with 4.5% coupons and a yield of 5.5%
c.6.5-year bond with 4% coupons and a yield of 3.5%
Explanation / Answer
Correct option is > a. 7-year bond with 9% coupons and a yield of 10.5%
The following is the working of each the bonds, the lowest price calculated for option a. working which is $926.93. It is lowest than all hence cheapest to deliver bond. One should by it from market for delivering.
Using financial calculator BA II Plus - Input details:
a.
b.
c.
I/Y = Rate or yield / frequency of coupon in a year =
5.25
2.75
1.75
PMT = Payment = Coupon / frequency of coupon =
-$45.00
-$22.50
-$20.00
N = Total number of periods = Years x frequency of coupon =
14
17
13
FV = Future Value =
-$1,000.00
-$1,000.00
-$1,000.00
CPT > PV = Bond Value =
$926.93
$932.82
$1,028.84
Using financial calculator BA II Plus - Input details:
a.
b.
c.
I/Y = Rate or yield / frequency of coupon in a year =
5.25
2.75
1.75
PMT = Payment = Coupon / frequency of coupon =
-$45.00
-$22.50
-$20.00
N = Total number of periods = Years x frequency of coupon =
14
17
13
FV = Future Value =
-$1,000.00
-$1,000.00
-$1,000.00
CPT > PV = Bond Value =
$926.93
$932.82
$1,028.84