Question

Question 1 [6 marks]

a. [1 mark ] Find the price (per $100 face value, rounded to 3 decimal

places) of a 12% Treasury bond, 145 days before maturity, at a yield

of 6.26% p.a. 1

b. [2 marks ] Suppose another student sees your answer to a., and says

“You’re wrong! Your answer is more than $100. The price

of a short term financial instrument should be always less

than its face value!”

Explain to this student why the price of the Treasury bond in a. is

greater than its face value of $100.

c. [3 marks ] Consider the bond in a., but rather price it 187 days before

maturity at a yield of 6.24% p.a. Here, a coupon payment is made

on the fifth day and the last day. Draw a cash flow diagram that

represents this scenario to accompany your answer.

Answer 1

a) P = FV * [ 1- (days of maturity)/360 * DY]

= 100 * [ 1 - (145/360) * 6.26/100]

= 100 * [ 1 - 0.45 * 0.06 ]

= 100 * (1 - 0.024)

=0.976 * 100

Price of treasury bill= $97.6

B) The price and yield of bond is detdrmined by the auction. The lowest face value on the bond is $1,000 and the lowest minimum bid accepted is $100.

C) P = FV * [ 1 - (days of maturity)/ 360* DY]

= 100 * [ 1- (187/ 360) *6.24/100]

= 100 * [ 1- (0.52 * 0.0624)]

= 100* (1-.032)

= 100* 0.968

=$ 96.8