Question

Locate the Treasury bond in Figure 7.4 maturing in February 2040. Assume a par value of $10,000 Is this a premium or a discount bond? Discount bond OPremium bond a. What is its current yield? (Do not round intermediate calculations and enter your answer as a percent rounded to 3 decimal places, e.g., 32.161.) b. What is its yield to maturity? (Do not round intermediate calculations and enter your answer as a percent rounded to 3 decimal places, e.g., 32.161.) c. What is the bid-ask spread in dollars? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) 3.560 % Current yield а. b. Yield to maturity Bid-ask spread 6.25 C. Treasury Notes and Bonds Asked Chg Maturity Bid Asked Yield Coupon 11/15/2018 100.1484 100.1641 1.160 0.0391 1.250 4/15/2019 0.875 0.0625 99.0859 1.286 99.0703 4/30/2020 98.5938 98.6094 0.1016 1.558 1.125 8/15/2021 8.125 127.4844 1.857 0.2344 127.5000 7/31/2022 99.9609 0.2266 2.000 99.9766 2.004 2/28/2023 96.5703 96.5859 2.096 0.2500 1.500 5/15/2024 101.9375 2.500 101.9531 0.3125 2.210 8/15/2025 0.3438 6.875 135.8438 135.8594 2.262 8/15/2026 0.2969 2.380 92.4766 1.500 92.4922 8/15/2027 136.8438 6.375 136.8281 0.4688 2.414 8/15/2028 130.3516 130.2891 5.500 0.4531 2.473 11/15/2028 128.1563 128.2188 2.485 5.250 0.4453 2/15/2029 128.7578 128.8203 2.478 0.4609 5.250 8/15/2029 139.1875 6.125 2.478 139.2500 0.5391 5/15/2030 142.6406 6.250 0.5938 2.478 142.5781 2/15/2031 134.3438 134.4063 0.5625 5.375 2.470 2/15/2036 128.0781 128.1406 2.618 4.500 0.7031 2/15/2037 131.8516 2.688 131.7891 4.750 0.7500 5/15/2037 136.0156 0.7656 2.690 5.000 135.9531 128.0625 128.1250 5/15/2038 0.6875 2.749 4.500 2/15/2039 0.6406 2.824 110.9844 111.0469 3.500 8/15/2039 2.839 4.500 127.4922 127.5547 0.7344 2/15/2040 4.625 129.7813 0.6953 2.855 129.7188 11/15/2040 123.3438 123.4063 2.885 4.250 0.7422 2/15/2041 2.872 132.4688 0.7578 4.750 132.5000 2/15/2042 103.3516 103.3828 0.6484 3.125 2.934 2/15/2043 0.6250 103.1406 3.125 103.1719 2.950 5/15/2043 2.875 98.3594 98.3906 0.5625 2.963 2/15/2044 3.625 112.7266 112.7578 0.6484 2.939 2/15/2045 90.7578 90.7891 0.6016 2.987 2.500 11/15/2046 98.1484 2.875 98.1172 0.6719 2.969

Answer 1

This is a premium bond

a]

current yield = annual coupon / price of bond

annual coupon = par value * coupon rate = $10,000 * 4.625% = $462.50

price of bond per $100 of par value = 129.7813 (the ask price is taken as that is the price paid by the buyer of the bond).

Price of bond = (129.7813 / 100) * $10,000 = $12,978.13

current yield = $462.50 /  $12,978.13 =  0.03564, or 3.564%

b]

YTM is calculated using the RATE function in Excel with these inputs :

nper = 21 -   21 years to maturity assuming that it is 2019 now

pmt = 462.50 - annual coupon payment. this is entered with a positive sign because it is a cash inflow to the buyer of the bond

pv = -12,978.13 - price of bond today. this is entered with a negative sign because it is a cash outflow to the bondholder

fv = 10,000 - face value of the bond receivable on maturity. this is entered with a positive sign because it is a cash inflow to the bondholder

RATE is calculated to be 2.74%

The YTM is 2.74%

c]

Bid-ask spread in dollars = (ask price - bid price) * par value = (129.7813 - 129.7188) * 10,000 = $625

The bid-ask spread per $100 of par value is $6.25