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In: Finance

U.S. Treasury quotes as follows: U.S. Treasury quotes from the WSJ on Oct. 15, 2003: Rate...

U.S. Treasury quotes as follows: U.S. Treasury quotes from the WSJ on Oct. 15, 2003:

Rate

Maturity

Ask

Change

Ask yield

7.1250

Oct 15, 2005

102:08

-1

5.9156

a. What is the duration of the above Treasury note? Use the asked price to calculate the duration. Recall that Treasuries pay interest semiannually.

b. If yields increase by 10 basis points, what is the approximate price change on the $100,000 Treasury note? Use the duration approximation relationship. Briefly discuss.

Solutions

Expert Solution

Part A ) Duration is calculated in the Excel and it is 1.85

Part B )

Since duration is 1.85 and yield is increased by 10 basis points hence the change in price can be calculated using the duration formula

Change in price = - Duration * Change in yield * Price

= -1.85 * 0.1% * 100,000 = -$185

So the price of treasury note will decrease by $185 or more precisely $184.88 when we take duration without round off as 1.8488

jeff jeffy answered 9 months ago
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