In: Finance
(A) An investor bought an US Treasury Bond that pays annual 5.25% coupon with a maturity of 3 years. Three (3) months (90 days) later, the investor is contemplating to sell the bond at an annual 5.55% yield to maturity. In the market, the US Treasury bond dealer is making a bid at 95.9055% and the investor seems to be willingly to sell it around this price. Should he sell his bonds at the market bid price? Note: The US Treasury Bond follows a Act/360 convention
Date on which instrument was bought | 29-Apr-20 | ||
Face Value | 100 | ||
Coupon rate | 5.25% | ||
annual coupon value | 5.25 | ||
Day convention | Actual/360 | ||
Today | 27-Jul-20 | ||
Maturity | 28-Apr-23 | ||
Yield | 5.55% | ||
Present Value Calculation | |||
Accrued Interest | 1.3125 | ||
Difference between today and 1st coupon | 275 | ||
Difference between today and 2nd coupon | 640 | ||
Difference between today and 3rd payment | 1005 | ||
Time Period | 28-Apr-21 | 28-Apr-22 | 28-Apr-23 |
Coupon Payments | 5.25 | 5.25 | 5.25 |
Face value | 0 | 0 | 100 |
Total Amount | 5.25 | 5.25 | 105.25 |
Discounting factor given by 1+ (yield *(Actual/360)). Here yield is 5.55%. Actual days is calculated above | 1.042396 | 1.098667 | 1.154938 |
Present value as of now (27-Jul-2020) by dividing the value by discounting factor | 5.036474 | 4.778519 | 91.13047 |
Sum of present values | 100.9455 | ||
Clean price | 100.9455 | ||
Dirty price=clean price+accrued interest | 102.258 | ||
In market the clean price is quoted while paying the buyer has to pay the dirty price | |||
Conclusion | |||
The investor should not sell the bond as the dealer is quoting less than the calculated clean price value |