Question 11 A 5 year Treasury bond (TBONDI) is sold onto the market one day at $

Question

Question 11 A 5 year Treasury bond (TBONDI) is sold onto the market one day at $100 with an annual coupon of $4. The following day bad news hits the market and a new 5 year Treasury bond is sold onto the market at $6 annual coupon (ie 6% yield) what is the approximate new secondary market price of the TBOND1? Show your calculation method. [5] Question 12 Explain briefly what happens to the money supply, the price of Treasury bills and the short term interest rate if the central bank pursues an expansionary open market operation. Use money market and Treasury bill market diagrams to illustrate your answer. [5]

Explanation / Answer

Answer to question 11:

New secondary market price of the TBONDI:

Coupon amount*PVAF(Re,Number of years)+Redemption Value*PVIF(Re,Number of years)

4*PVAF(6%,5)+100*PVIF(6%,5)

4*4.21236378546+100*0.74725817283

91.5776279718 or $91.58

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