Question

Table below presents information on three US Treasury bonds:

Maturity	Coupon Rate	Price (per $100 of Face value)
6 months	1%	99.75
12 months	2%	100.5
18 months	1.5%	98.5

Use this information to answer the following questions:

Suppose that US Treasury plans to issue 5% coupon bonds, which pay semi-annual coupons. The bonds will mature in 18 months. What is the price of these bonds?

Answer 1

It is assumed that the coupon payment of existing bonds is semi annual.

YTM of the 18 months Treasury Bond is 2.525359% calculated using the RATE function of Excel as follows:

At this YTM, price of the new bond for 18 months, with 5% coupon payable  semiannually is calculated at $103.620157 using the PV function of Excel as follows (assuming Face Value at $100):