In: Finance
9.
a. You’re considering buying a 10 year US Treasury 7% coupon bond with a face value of $1000. The bond pays coupons semi-annually. The next coupon will be paid in 6 months. The bond is currently selling for $977.12. Using Excel’s IRR command, determine the YTM of the bond. Express your answer as an effective annual rate (EAR). (Not at an APR).
Report your answer as a decimal, not as a percent, using at least 4 significant digits.
Hint: Be careful here. Because you’ll need to express the cash flows with a 6 month frequency, the IRR command will return the YTM expressed as an effective 6-month rate.
b. You’re considering buying a 7 year US Treasury 3% coupon bond with a face value of $1000. The bond pays coupons semi-annually. The next coupon will be paid in 6 months. The bond has a YTM of 7.4% when expressed as an effective annual rate (EAR). Determine the price of the bond. Express you answer in dollars and cents.
HINT: If you use Excel’s NPV command, remember that it must not include the cash flow at t = 0. If you do the computation by hand, be sure to keep the accuracy of your computations high. I’d suggest you do both in order to check your answer before you enter it
Calc:
Q-1: There are 20 periods to bond as years are 10, whereas compounding is twice per year. IRR is used to calculated APR, then Effective rate is calculated using the formula =(1+APR/n)^n-1
Q-2 First Effective rate is converted to APR using the function =EFFECT(APR, frequency), then it is used as IRR to calculate the NPV or the price of the bond
If you have any queries you can ask in the comment section, thanks