1. A Treasury STRIPS matures in 11.0 years and has a yield to maturity of 15.4 p

Question

1. A Treasury STRIPS matures in 11.0 years and has a yield to maturity of 15.4 percent. Assume the par value is $100,000,

a.

What is the price of the STRIPS? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

  Price

$   

b.

What is the quoted price? (Round your answer to 3 decimal places.)

  Quoted price

2. A Treasury STRIPS is quoted at 59.705 and has 17 years until maturity. What is the yield to maturity?(Round your answer to 2 decimal places. Omit the "%" sign in your response.)

  YTM

%

3. A U.S. Treasury bill with 76 days to maturity is quoted at a discount yield of 1.90 percent. What is the bond equivalent yield? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

  Bond equivalent yield

%

4. A Treasury bill with 140 days to maturity is quoted at 96.540. What is the bank discount yield, the bond equivalent yield, and the effective annual return? (Input all amounts as positive values. Round your answers to 3 decimal places. Omit the "%" sign in your response.)

  Discount yield

%  

  Bond equivalent yield

%  

  Effective annual return

%  

1. A Treasury STRIPS matures in 11.0 years and has a yield to maturity of 15.4 percent. Assume the par value is $100,000,

Explanation / Answer

1.

STRIPS Price = Face value /(1+YTM/2)2M =100,000/(1+0.154/2)22=100,000/5.114=19,554.16

(Where M= no of years to maturity.)

So STRIPS price is $19,554.16

STRIPS quote is19,554:50 in 32nd expression

2.

STRPS quote is 59.705 = $59.225

YTM= 2*[ (Face Value/STRIPS Price)1/2M-1]

Face value =100. M=17 years

YTM= 2*[(100/59.225)0.029-1]=2(1.01551-1)=0.0310

So YTM=3.10%

3. Bond equivalent Yield = 365*Discount yield/(360-days to maturity *discount yield)

Discount yield= 1.9%

Days to maturity 76 days

BEY = 365*0.019/(360-76*.019)=6.935/358.55=0.01934

Or , BEY=1.93%

4.

Bill price =Face value *[1- days to maturity/360*discount yield]

Bond price $96.17 . days to maturity 140, face value =100

So, 96.17= 100*[1-140/360*disc yield]

Or, 96.17=100-38.88*disc yield

Or Discount yield= 9.85%

Bond Equivalent Yield = 365*Discount yield/(360-days to maturity *discount yield)

= 365*0.0985/(360-140*0.0985)

=35.95/346.21

=10.38%

So BEY=10.38%

Effective Annual Yield= EAR

Formula 1+EAR=[1 + BEY/m]m

M= no pof periods =365/140=2.60

So, 1+EAR= [1+0.1038/2.6]2.6

Or, 1+EAR =1.1070

Or EAR = 0.1070=10.70%

So , EAR =10.70%

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