Suppose a U.S. Treasury bond will pay $1,000 twenty years from now, with no inte

Question

Suppose a U.S. Treasury bond will pay $1,000 twenty years from now, with no interest payments in between. If the going interest rate on 20-year treasury bonds is 3.03%, how much is the bond worth today? Your answer should be between 440.00 and 720.00, rounde with no special characters. 2 decimal places, Question 4 5 pts Suppose the U.S. Treasury offers to sell bonds for $770. No payments will be made until the bond matures 12 years from now. at which time it will be redeemed for $1.000. What interest rate would the bond earn if it were purchased at this pricc? Your answer should be between 1.08 and 5.64, rounded to 2 d special characters. ecimal places, with no

Explanation / Answer

Value of Zero Coupon Bond = PV of cash flows from it

Value of Bond = Cash flow * PVF(r%, n)

= $ 1000 * PVF ( 3.03%, 20)

= $ 1000 * ( 1 / (1+0.0303)^20)

= $ 1000 * ( 1 / 1.8167)

= $ 1000 * 0.55046

= $ 550.46

Part 2:

YTM is the rate at which PV of Cash Flow equals to Purchase price

Thus

Maturity Value * PVF (r%, n) = Purchase Price

Thus

1000 * PVF (r%, n) = $ 770

1000 * (1 / (1+r)^12 ) = 770

(1+r)^12 = 1000 / 770

(1+r)^12 = 1.2987

1+r = 1.2987^(1/12)

= 1.0220

r = 0.0220

i.e 2.20%

Pls comment, if any further assistance is required.

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