It is 2018. You decided to purchase a US treasury bond now. It matures in 8 year
ID: 2616195 • Letter: I
Question
It is 2018. You decided to purchase a US treasury bond now. It matures in 8 years (in 2026), has a face value of S100,000, a coupon rate of 6 percent (as usually, you get the first coupon in a year, i.e. 2019) and a yield of 7 percent. a) Even before proceeding to calculations, you refresh what you learnt in the M&B; class and immediately realize that you would have to pay... rather than the face value of this bond (choose: more or less) b) Based on this information, you quickly calculate that you would have to pay $--for this bond. c) You purchased the bond back in 2017. It is 2018 now, and you've received the first coupon payment. Shortly after this, FED's actions led to an unexpected change in yield of all bonds. The yield for your bond now is 9 percent. What is the price of your bond now? d) but, if you actually feel completely indifferent to any changes in the bond price (even if it drops a lot) and yield, it must be the case that you planned originally to... (write a sentence or two explaining the reason when you feel not affected by this at all).Explanation / Answer
a.
Correct option is > less
Reason: Without calculation we can observe that bond yield is more than bond coupon that implies that bond price will be less than face value of the bond.
b.
Using financial calculator BA II Plus - Input details:
#
I/Y = Yield =
7
FV = Future Value =
-$100,000
N = Number of coupon =
8
PMT = Coupon =
-$6,000
CPT > PV = Bond Value =
$94,028.70
c.
I will assume two maturity here as it is not stated in question. First is 9 years and second is 8 years and solve with both.
If bond starts in year 2017 and assuming maturity date is in 2026: total 9 years to mature.
Using financial calculator BA II Plus - Input details:
#
I/Y = Yield =
9
FV = Future Value =
-$100,000
N = Number of coupon =
9
PMT = Coupon =
-$6,000
CPT > PV = Bond Value =
$82,014.26
For 8 years of maturity:
Using financial calculator BA II Plus - Input details:
#
I/Y = Yield =
9
FV = Future Value =
-$100,000
N = Number of coupon =
8
PMT = Coupon =
-$6,000
CPT > PV = Bond Value =
$83,395.54
d.
Investor can be unaffected by change in interest rate scenarios if he or she has planned to invest for earning coupons. In such case investor will not be interested in selling bonds before maturity and price fluctuations doesn’t matter to such investors.
Using financial calculator BA II Plus - Input details:
#
I/Y = Yield =
7
FV = Future Value =
-$100,000
N = Number of coupon =
8
PMT = Coupon =
-$6,000
CPT > PV = Bond Value =
$94,028.70
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