Yield Curve and Bond Valuation Worksheet Action Items: 1. Go to the http://www.f
ID: 2734800 • Letter: Y
Question
Yield Curve and Bond Valuation Worksheet Action Items:
1. Go to the http://www.federalreserve.gov/releases/h15/data.htm to examine historical daily interest rates on U.S. Treasuries. 2. Scroll down to "Treasury constant maturities" and in the row "1-month" under "Nominal" click "Business day."
As you can see, rates on the one-month U.S. Treasury bill are provided for each business day from July 31, 2001 to the present.
For this assignment you are asked to pick a business date five years ago this month. (For example, in January 2012 I would pick a business date in January 2007.)
Then, using this row and the subsequent rows below it under “Treasury Constant Maturities” determine the shape of the yield curve (See Figure 6.11in the textbook for examples of Treasury yield curves) on that date five years ago based on the rates published by the Fed by completing the table below for the listed Treasury maturities (see example below):
Business Date Chosen Five Years Ago:
1-month Nominal T-bill Rate on that Date:
3-month Nominal T-bill Rate on that Date:
6-month Nominal T-bill Rate on that Date:
1-year Nominal T-note Rate on that Date:
5-year Nominal T-note Rate on that Date:
10-year Nominal T-note Rate on that Date:
20-year Nominal T-bond Rate on that Date:
30-year Nominal T-bond Rate on that Date:
Answer the following questions:
3. On your selected date was the yield curve rising, falling, or flat? What explanation(s) would you give for this shape:
Assume that two U.S. Treasury securities were purchased at par ($1000) on your selected date five years ago: 1) a 10-year T-note and 2) a 20-year T-bond. Also assume that for each of the two securities the reported nominal rate that you found above was the coupon rate at issuance.
Assuming semi-annual coupon payments, calculate the value of each bond today after 5 years based on the current 5-year Treasury constant maturity nominal rate for the original 10-year note and a current 15-year rate (assume it is the average of the current Treasury constant maturity nominal 10- and 20-year rates) for the original 20-year bond at http://www.federalreserve.gov/releases/h15/data.htm.
Complete the following tables (see example below):
10-Year Bond Purchased for $1000 5 Years Ago
Original Value
$1000
Coupon Rate (From table you completed above at the chosen date from 5 years ago, the original 10-year Nominal T-bond Rate divided by 2 for semi-annual payments)
Current 5-Year Yield to Maturity (The most recent 5-year Nominal T-note Rate reported at the Fed site divided by 2 for semi-annual payments)
Number of Semi-Annual Periods Remaining
10
Current Value*
Gain or Loss on the Bond over the 5 years
20-Year Bond Purchased for $1000 5 Years Ago
Original Value
$1000
Coupon Rate (From table you completed above at the chosen date from 5 years ago, the original 20-year Nominal T-bond Rate divided by 2 for semi-annual payments)
Current 15-Year Yield to Maturity (Take the average of the most recent 10- and 20-year Nominal T-bond Rates reported at the Fed site, and then divide this average rate by 2 for semi-annual payments)
Number of Semi-Annual Periods Remaining
30
Current Value*
Gain or Loss on the Bond over the 5 years
*Current Value = PVBond = Coupon Payment +
b) Did you gain or lose more on one bond relative to the other? Explain.
Original Value
$1000
Coupon Rate (From table you completed above at the chosen date from 5 years ago, the original 10-year Nominal T-bond Rate divided by 2 for semi-annual payments)
Current 5-Year Yield to Maturity (The most recent 5-year Nominal T-note Rate reported at the Fed site divided by 2 for semi-annual payments)
Number of Semi-Annual Periods Remaining
10
Current Value*
Gain or Loss on the Bond over the 5 years
Explanation / Answer
Date Considered = 02/01/2007
1-month Nominal T-bill Rate on that Date: = 0.02 %
3-month Nominal T-bill Rate on that Date: 0.03%
6-month Nominal T-bill Rate on that Date:= 0.1 %
1-year Nominal T-note Rate on that Date:= 0.18 %
5-year Nominal T-note Rate on that Date:= 1.55 %
10-year Nominal T-note Rate on that Date:= 2.97%
20-year Nominal T-bond Rate on that Date:= 3.87%
30-year Nominal T-bond Rate on that Date: = 4.19%
3. On your selected date was the yield curve rising, falling, or flat? What explanation(s) would you give for this shape: Yield Curve was rising , Yield curve was flat and Yield curve was flat . At the given dates yield was rising , Because It was The normal yield curve implies that both fiscal and monetary policies are currently expansionary and the economy is likely to expand in the future. The higher yields on longer term maturity securities also means that the short term rates are likely to increase in the future as the growth in the economy would lead to higher inflation rates.
1) 10-Year Bond Purchased for $1000 5 Years Ago
Original Value
$1000
Coupon Rate (From table you completed above at the chosen date from 5 years ago, the original 10-year Nominal T-bond Rate divided by 2 for semi-annual payments)
2.97 %
Semi annually i.e 1.485%
Current 5-Year Yield to Maturity (The most recent 5-year Nominal T-note Rate reported at the Fed site divided by 2 for semi-annual payments) as on 16/06/2016
1.1 %
Semi anually it is 0.55 %
Number of Semi-Annual Periods Remaining
10
Current Value*
$ 1090.73
Please refer
Solution no 1
Gain or Loss on the Bond over the 5 years
Gain of $ 90.73
20-Year Bond Purchased for $1000 5 Years Ago
Original Value
$1000
Coupon Rate (From table you completed above at the chosen date from 5 years ago, the original 20-year Nominal T-bond Rate divided by 2 for semi-annual payments)
3.42%
Semi annually rate 1.71%
Current 15-Year Yield to Maturity (Take the average of the most recent 10- and 20-year Nominal T-bond Rates reported at the Fed site, and then divide this average rate by 2 for semi-annual payments) as on 16/06/2016
20 Year rate = 1.96 %
10 year rate = 1.57 %
1.77 %
Semi annually = 0.88 %
Number of Semi-Annual Periods Remaining
30
Current Value*
$ 1218.01
Gain or Loss on the Bond over the 5 years
$ 218.01
3) In this question i gain more on one bond relative to the other. because int rate on bond is higher than Yeild to Maturity . Present value of 20 year Bond will be Higher than 10 Year Bond . Beacuse as maturity increase gain on 20 year bond will increase over 10 year bond as YTM is less than Coupon rate it will increase value of Bond as investor will invest in bond becoz market interest rate is lower than Coupon rate . Value of bond will increase
Solution -1
Solution no 2
Yes i gain over
Original Value
$1000
Coupon Rate (From table you completed above at the chosen date from 5 years ago, the original 10-year Nominal T-bond Rate divided by 2 for semi-annual payments)
2.97 %
Semi annually i.e 1.485%
Current 5-Year Yield to Maturity (The most recent 5-year Nominal T-note Rate reported at the Fed site divided by 2 for semi-annual payments) as on 16/06/2016
1.1 %
Semi anually it is 0.55 %
Number of Semi-Annual Periods Remaining
10
Current Value*
$ 1090.73
Please refer
Solution no 1
Gain or Loss on the Bond over the 5 years
Gain of $ 90.73
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.