The following table shows the prices of a sample of Treasury strips. Each strip

Question

The following table shows the prices of a sample of Treasury strips. Each strip makes a single payment at maturity. Calculate the interest rate offered by each of these strips. Years to Maturity Price, % 1 98.652% 2 95.151 3 91.344 4 87.280

a. What is the 1-year interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

b. What is the 4-year rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Explanation / Answer

Solution:

To compute the interest rate for each year :

consider 1000 is the value then

1000/1+r1 = 986.52

hence r1 = 1.36%

next 1000/(1+r2)^2 = 951.51

= r2 = (1000/951.51) - 1

= 5.09%

r3 = 1000/(1+r3)^3 = 913.44

r3 = 9.47%

r4 = 1000/(1+r4)^4 = 872.80

r4 = 14.57%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.