Question

You find the following Treasury bond quotes. To calculate the number of years until maturity, assume that it is currently May 2016. The bonds have a par value of $1,000. Rate Maturity Mo/Yr Bid Asked Chg Ask Yld ?? May 21 103.5397 103.5275 +.3235 5.899 6.002 May 26 104.4887 104.6344 +.4233 ?? 6.138 May 36 ?? ?? +.5340 3.931 In the above table, find the Treasury bond that matures in May 2036. What is the asked price of this bond in dollars? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Asked price $ If the bid-ask spread for this bond is .0637, what is the bid price in dollars? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Bid price $

Answer 1

(a)-Asked Price of this Bond

• The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
• The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
• Here, the calculation of the Bond Price using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 6.138% x ½]	PMT	30.69
Market Interest Rate or Yield to maturity on the Bond [3.931% x ½]	1/Y	1.9655
Maturity Period/Time to Maturity [(May 2016 to May 2036) x 2]	N	40
Bond Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond (PV) = $1,303.70.

“Hence, the Asked price of this Bond will be $1,303.70”

(b)- Bid price in dollars

Bid price in dollars = Asked Price for the Bond – Change in bid-ask spread in Dollars

= $1,303.70 - [$1,000 x (0.0637 / 100)]

= $1,303.70 - $0.6370

= $1,303.07