Question

Consider three different US Treasury securities with maturities T = 1, 2 and 3 years, all with principal of $100. As usual convention, today is time t=0.

• One year Treasury bill trades at price ? = $97

• Two year Treasury note which pays 4% coupon annually, trades at ? = $100.60

• Three year Treasury note which pays 5% coupon 5% annually, trades at ? = $101.90

• Compute YTM (yield-to-maturity, y) of all three bonds.

Answer 1

	ONE YEAR TREASURY BILL
	Current Market Price at T=0	$97
	Maturity value at T=1	$100
	Yield to   maturity =r
	97*(1+r)=100
	1+r=100/97=	1.030928
	Yield to   maturity =r=	0.030928
	Yield to   maturity in percentage	3.1%
	TWO YEAR TREASURY NOTE
	Current Market Price at T=0	$100.60
	Maturity value at T=2	$100
	Coupon payment (yearly)	$4	(100*0.04)
	CASH FLOWS:
	T	Cash Flow
	0	($100.60)
	1	$4
	2	$104
	Yield to Maturity	3.7%	(Using IRR function of excel   over the cash flows)
	THREE YEAR TREASURY NOTE
	Current Market Price at T=0	$101.90
	Maturity value at T=2	$100
	Coupon payment (yearly)	$5	(100*0.05)
	CASH FLOWS:
	T	Cash Flow
	0	($101.90)
	1	$5
	2	$5
	3	$105
	Yield to Maturity	4.3%	(Using IRR function of excel   over the cash flows)