P 6-9 (book/static) Question Help For each of the following pairs of Treasury se
ID: 2794402 • Letter: P
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P 6-9 (book/static) Question Help For each of the following pairs of Treasury securities (each with $1,000 par value), identify which will have the higher price: a. A three-year zero-coupon bond or a five-year zero-coupon bond? b. A three-year zero-coupon bond or a three-year 4% coupon bond? C. A two-year 5% coupon bond or a two-year 6% coupon bond? a. A three-year zero-coupon bond or a five-year zero-coupon bond? Which will have the higher price? (Select the best choice below.) O A. A three-year zero-coupon bond, because the present value is received sooner and the future value is higher. O B. A three-year zero-coupon bond, because the future value is received sooner and the present value is higher. ° C. A five-year zero-coupon bond, because the present value is received sooner and the future value is higher. D. A five-year zero-coupon bond, because the future value is received later and the present value is higher.Explanation / Answer
Q1- a) (B) 3 yr ZCB will have a higher price, because price of a ZCB = PV of its redumption value and the sooner you receive some amount its PV is higher then that of an amount received later on. b) Since these bonds have same maturity value and also same time period but in case of coupon bond we will receive additional cashflows as coupons. Therefore its price will be higher. (Ans - 4% coupon bond) ( c) Same maturity period and same maturity value, but 6% coupon will provide higher coupons and hence result in higher pv therefore higher price.(Ans - 6% coupon bond) Q-2 a) YTM of bond = the rate at which price becomes equal to PV of cash flows of bond 1034.58 = 1000 x 8.4% x 6/12 x PVAF(r,20) + 1000 x PVIF (r,20) AT r(semi annual) Price 5% 900.3 r 1034.58 -143.95 3% 1178.53 -278.23 0.517378 Using linear interpolation - 1.0348 r-3/5-3 = (1034.58-1178.53)/(900.3-1178.53) r-3 = -143.95/-278.23 x 2 r = 3 + 1.0348 r = 4.0348 (Approx) For 6 months APR = 8.069511 (4.0348 x 12/6) You can also use IRR function in excel for calculating YTM. (b) Price of bond at YTM =9.6 Price = 42 x PVAF (4.8%, 20) + 1000 x PVIF(4.8%,20) Price = 42 x 12.6763 + 1000 x 0.3915 Price = 532.4 + 391.54 = 923.94 Please post rest of the questions separately. Please provide feedback… Thanks in advance.. :-)
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