2.Judy Johnson is choosing between investing in two Treasury securities that mat

Question

2.Judy Johnson is choosing between investing in two Treasury securities that mature in five years and have par values of $1,000. One is a Treasury note paying an annual coupon of 5.06 percent. The other is a TIPS which pays 3 percent interest annually: a.what is its price if investors required rate of return is 6.09 percent on similar bonds? Treasury notes pay interest semiannually. b. Herron corporation wants to issue five-year notes but investors require a credit risk spread of 3 percentage points. What is the anticipated coupon rate on the Erron notes? Type your question hereType your question here

Explanation / Answer

a)

Price of treasury note = 50.60 PVIFA(6.09%,5) + 1000 PVIF(6.09%,5) = $956.72

Price of TIPS = 30 PVIFA(6.09%,5) + 1000 PVIF(6.09%,5) = $870.16

b)

Anticapet coupon rate = 8.06%

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