Question

1. A. You purchase a 2-year discount Treasury note for $961.17 with a Face Value of $1,000, calculate the yield to maturity (YtM) on this bond? (2 points—note, this is a PV of lump sum formula solving for i)

B. Investors are getting worried about the economic recovery and there is a “flight to quality,” increasing the demand for Treasuries. Given the increased demand, the price of the 2-year note has increased to $964.00. Calculate the new YtM (2 points—note, show out to 4 decimal places before converting to %).

Answer 1

Bond YtM = (Face value after 2 years / Current bond price)^(1/2) - 1

(A)

YtM = (1,000 / 961.17)^(1/2) - 1 = (1.0404)^(1/2) - 1 = 1.0200 - 1 = 0.0200 = 2.00%

(B)

YtM = (1,000 / 964)^(1/2) - 1 = (1.00373)^(1/2) - 1 = 1.0185 - 1 = 0.0185 = 1.85%