1. Today, you can buy a 15-year Treasury bond with a 3.8% coupon rate for $1067.49. Show...

1. Today, you can buy a 15-year Treasury bond with a 3.8% coupon rate for $1067.49. Show your work.

Calculate the Yield-to-Maturity for this bond
Assume the bond is callable 6 years from now for $1019. Based on this, calculate the Yield-to-Call for this bond
Assume that YOUR required return for this bond is 3.5% (and ignore the call provision). Based on this, what is the most YOU would be willing to pay? Given that, would you be interested in buying this bond at the current price of $1067.49? PLEASE SHOW CALCULATIONS

Solutions

Expert Solution

Being a Treasury Bond, coupon payment frequency is assumed as semi annual.

Part A: YTM of the bond= 1.614399%

Part B: Assuming call able in 6 years, Yield to Call (YTC)= 2.860401%

Part C: If the required rate of return is 3.5%, value of the bond= $1,034.78

Since the value ascertained as above is less than the selling price of $1,067.49, it will not be bought at this selling rate.

Calculations as below:

jeff jeffy answered 1 year ago

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