The ask yield on a 6 percent coupon Treasury bond maturing in eight years is 5.488...

The ask yield on a 6 percent coupon Treasury bond maturing in eight years is 5.488 percent. If the face value is $1,000, what should be the QUOTED cost of the bond today (use semiannual compounding)?

A. 103.2795

B. 107.2542

C. 106.8542

D. 108.5511

E. 104.3678

Solutions

Expert Solution

Par value			$1,000.00
Coupon Interest rate =			6%
Semiannual coupon rate			3%
Interest per coupon	(1000*3%) =		$30.00
YTM rate			5.488%
Semiannual YTM rate =			2.744%
No. of years			8
No. of periods (10 Years * 2)			16


Calculation of price of bond @ 2.744% YTM

Annual Interest received =		30.00
Cumulative P.V.F. @ 2.744 % for 16 periods =
(1- ((1/(1.02744)^16)))/0.02744		12.81050102

Present value of interest received (30 * 12.81050)			$384.32

Maturity amount received =		1000
P.V.F. @ 2.744 % for 16 th period =		0.648479852
(1/(1+0.02744)^16)
Present value of Maturity amount(1000*0.648479)			$648.48

Price of bond			$1,032.79

Quoted price of bond = 1032.79/1000 * 100 =			103.2794883

So, Quoted price of bond is 103.2795%. Answer A.

jeff jeffy answered 10 months ago

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