Question

The Shield Corporation has BB-rated bonds with a yield to maturity of 6.40% APR. A U.S Treasury, with the same maturity, currently has a yield to maturity of 4.02% APR. Both bonds pay semi-annual coupons at a 6.76% APR and have 5.00 years until maturity. (assume $1,000 face value)

What is the current price of the Treasury bond?

Answer 1

Price of Treasury Bond = PV of CFs from it.

Period	CF	PVF @2.01%	Disc CF
1	$      33.80	0.9803	$      33.13
2	$      33.80	0.9610	$      32.48
3	$      33.80	0.9420	$      31.84
4	$      33.80	0.9235	$      31.21
5	$      33.80	0.9053	$      30.60
6	$      33.80	0.8874	$      30.00
7	$      33.80	0.8700	$      29.40
8	$      33.80	0.8528	$      28.83
9	$      33.80	0.8360	$      28.26
10	$      33.80	0.8195	$      27.70
10	$ 1,000.00	0.8195	$    819.54
Price of Treasury Bond			$ 1,123.00