A U.S. Treasury bill with 75 days to maturity is quoted at a discount yield of 1

Question

A U.S. Treasury bill with 75 days to maturity is quoted at a discount yield of 1.25 percent. What is the bond equivalent yield?

Suppose you purchase a $1,000 TIPS on January 1, 2013. The bond carries a fixed coupon of 2 percent. Over the first two years, semiannual inflation is 1 percent, 2 percent, 2 percent, and 3 percent, respectively. For each six-month period, calculate the accrued principal and coupon payment

Accrued Principal Coupon Payment

First Six Months ? ?

Second 6 months ? ?

Third 6 months ? ?

Four 6 months ? ?

A Treasury bill with 119 days to maturity is quoted at 97.630. What is the bank discount yield, the bond equivalent yield, and the effective annual return?

Suppose you purchase a $1,000 TIPS on January 1, 2013. The bond carries a fixed coupon of 2 percent. Over the first two years, semiannual inflation is 1 percent, 2 percent, 2 percent, and 3 percent, respectively. For each six-month period, calculate the accrued principal and coupon payment

Accrued Principal Coupon Payment

First Six Months ? ?

Second 6 months ? ?

Third 6 months ? ?

Four 6 months ? ?

A Treasury bill with 119 days to maturity is quoted at 97.630. What is the bank discount yield, the bond equivalent yield, and the effective annual return?

Discount yield %   Bond equivalent yield %     Effective annual return

Explanation / Answer

1.

Let the face value of the bill be $1,000.

Discount yield = (Discount / par value) * (360/Days to maturity)

0.0125 = (Discount/$1,000) * (360/75)

Discount/$1,000 = 0.06

Discount = 0.06 * $1,000 = $60

Purchase price = $1,000 - $60 = $940

Bond equivalent yield = {($1,000 - $940)/$940} * 365/75 = 0.3106 = 31.06%

3.

a)

Discount yield = (Discount / par value) * (360/Days to maturity)

Discount yield = {($1,000 - $976.30)/$1,000} * (360/119) = 0.0717 = 7.17%

b)

Bond equivalent yield = {($1,000 - $976.30)/$976.30} * 365/119 = 0.0745 = 7.45%

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