Treasury note and bond data are representative over-the-counter quotations as of

Question

Treasury note and bond data are representative over-the-counter quotations as of 3 p.m. Eastern time. Locate the Treasury bond in Figure 6.3 maturing in November2021. Assume a $1.000 par value. Requirement 1: Is this a premium or a discount bond? Requirement 2: What is its current yield? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Current yield % Requirement 3: What is its yield to maturity? (Do not round intermediate calculations. Round your answer to 3 decimal places (e.g., 32.162).) Yield to maturity % Requirement 4: What is the bid-ask spread in dollars? (Do not round intermediate calculations. Round your answer to 3 decimal places (e.g., 32.162).) Bid-ask spread $

Explanation / Answer

1. The bond is a discount bond as it is trading below the par value of $1,000.

2. Current yield = Anual Cash flows/ Current market price

Annual cash flow = coupon = 2% of $1,000 = $20

Current market price = 99.6063 % of $1,000 (the bid and ask prices are as a % to par value)

CMP = 999.063

CY = 20/999.063 x 100

CY = 2.0018%

3. YTM is the rate at which the present value of cash inflows = its outflow

In this case the saked yield is given which is the rate of return or yield the investor will earn on the bond.

So

4. Bid ask spread in dollars:

First lets calculate the bid and ask prices

Bid = 99.9063% of $1,000 = $999.063

Ask = 99.9531% of $1,000 = $999.531

Bid ask spread = Ask price - bid price

= $999.531 - 999.063

Bid ask spread = $0.468

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