3. The market price of a 4-year 6% coupon non-Treasury issue is $102.4083. a. Ca

ID: 2773167 • Letter: 3

Question

3. The market price of a 4-year 6% coupon non-Treasury issue is $102.4083.

a. Calculate the current yield

b. Calculate the yield to maturity

c. Compute the zero-volatility spread over the Treasury spot rate.

Assume the following Treasury spot rate curve for this problem:

Period Years to maturity Spot Rate

1 .5 2.00%

2 1.0 2.40%

3 1.5 2.80%

4 2.0 3.40%

5 2.5 4.00%

6 3.0 4.20%

7 3.5 4.40%

8 4.0 4.80%

3. The market price of a 4-year 6% coupon non-Treasury issue is $102.4083.

a. Calculate the current yield

current yield = Coupon/Current Price

current yield = (6%*1000)/(102.4083%*1000)

current yield = 5.86%

b. Calculate the yield to maturity

Yield to maturity = rate(nper,pmt,pv,fv)*2

nper(no of semi annual period) = 4*2 = 8

pmt (semi annual coupon) = 6%*1/2*1000 = 30

pv= 102..4083%*1000 = 1024.083

fv = 1000

Yield to maturity = rate(8,30,-1034.083,1000)*2

Yield to maturity = 5.05%

c. Compute the zero-volatility spread over the Treasury spot rate.

zero-volatility spread over the Treasury spot rate = Yield to maturity - Spot rate

zero-volatility spread over the Treasury spot rate = 5.05% - 4.80%

zero-volatility spread over the Treasury spot rate = 0.25%

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