We now move on to consider a Treasury bond. It is redeemable at par (i.e., for $

Question

We now move on to consider a Treasury bond. It is redeemable at par (i.e., for $100) on 15 July 2020. The coupon rate is 6% p.a. payable half-yearly. The price on 15 July 2015 to yield 5% p.a. compounded half yearly is $104.376 (per $100 face value). Ignore tax in parts c., d. and e. below. Find the price (per $100 face value) on 4 July 2015 to provide an investor with a yield of 5% p.a. compounded half-yearly. (The number of days from 15 January 2015 to 15 July 2015 is 181). Now find the price of the same Treasury bond, for the same yield, on 12 July 2015. Explain words why the price on 12 July 2015 is lower than the price on 4 July 2015.

Explanation / Answer

c. Price = (C/2) [{1-(1+r/2)-2t / (r/2)}] + F/ (1+r/2)2t

Where,

C=Coupon amount annually

r = YTM

F = Face Value of bonds

Price on 4 July 2015 = $104.40

d. Bond price = $104.38

e. Bond price on 12th July is lower than on 4th July because, the 4th July cost of bonds included next coupon interest payment due after 11 days which is now reduced to only 3 days on 12th July.

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