Question

In: Finance

1. Assume that you held a Treasury note that makes coupon payments on May 15 and...

1. Assume that you held a Treasury note that makes coupon payments on May 15 and November 15.   The number of days between each coupon payment is 184.  Suppose you sold the bond on June 27, 2016.  If the number of days between May 15 and June 27 is 43, the bond carried a coupon rate of 3.875% and matures as of May 15, 2026 ($1,000 par value),

a) What would have been the settlement (dirty) price on June 27, 2016 if the bond was priced to yield 4.0369%?  

b) What was the accrued interest?  

c) What was the market price (quoted on the Wall Street Journal)?

Solutions

Expert Solution

Settlement date 27-Jun-16
Redemption date 15-May-26
Coupon rate 3.88%
Coupon frequency Half yearly
Face Value 1000
Yield 4.039%
number of days between each coupon payment is 184
number of days between last coupon payment date and settlement date is 43
15-May-16 15-May-26
Period 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Coupon/CF 19.375 19.375 19.375 19.375 19.375 19.375 19.375 19.375 19.375 19.375 19.375 19.375 19.375 19.375 19.375 19.375 19.375 19.375 19.375 1019.375
Yield 0.020195 0.020195 0.020195 0.020195 0.020195 0.020195 0.020195 0.020195 0.020195 0.020195 0.020195 0.020195 0.020195 0.020195 0.020195 0.020195 0.020195 0.020195 0.020195 0.020195
Disc. Factor 0.980205 0.9608014 0.941782 0.9231393 0.904866 0.8869535 0.869396 0.8521862 0.835317 0.8187816 0.802574 0.786687 0.771114 0.755849 0.740887 0.726221 0.711846 0.697754 0.683942 0.670403365
PV of CF 18.99147 18.615527 18.24703 17.885824 17.53177 17.184724 16.84455 16.511107 16.18427 15.863894 15.54986 15.24205 14.94033 14.64458 14.35469 14.07054 13.79201 13.51899 13.25138 683.3924306
Sum of CF 986.617022
Clean price 986.617022
Accrued Intt. = 19.375*43/184 4.527853
Dirty Price = Clean price + Accrued Interest
991.1448753

a) Dirty price as calculated above

b) Accrued interest as calculated above

c) Market price is clean price as calculated above

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