Question

In: Finance

(A) An investor bought an US Treasury Bond that pays annual 5.25% coupon with a maturity...

(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

Solutions

Expert Solution

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

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