Judy Johnson is choosing between investing in two Treasury securities that matur

Question

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.

Using the information from above,

A.) What is its price if investors' required rate of return is 6.09 percent on similar bonds? Treasury note pay interest semi-annually.

B.) Erron 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?

Explanation / Answer

a) Price = 25.30 PVIFA(10,3.045%) + 1000PVIF(10,3.045%) = 215.32 + 740.85 = $956.17

b) anticipated coupon rate is ( 5.06 + 3 ) = 9.06% annually

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