Question

9a. You are considering the purchase of a Pure Discount Bond with a Face Value of $10,000, which matures in seventy-four days. If you desire a return of 2.45%, how much would you bid for the bond today? (Round your answer to two decimal place, e.g. 9,274.36)

b. Suppose that you decided to purchase the bond described above for the calculated price. Now assume that immediately after you purchased the bond, the rate rises by 15 Basis Points. What will now be the price of the bond after this rise in rates? (Round your answer to two decimal place, e.g. 9,274.36)

c. You are considering the purchase of a Pure Discount Bond with a Face Value of $10,000, which matures in sixty-three days. In the markets this bond is selling for $9,936.66. If you purchase the bond at this price what is the Yield-to-Maturity (YTM) on the investment? (The answer is a percent, round your answer to two decimal place, e.g. 4.75)

Answer 1

(a) Face Value = $ 10000, Interest Rate = 2.45 %, Maturity = 74 days

Bond Price = 10000 x [1-(0.0245) x (74/360)] = $ 9949.64

(b) Face Value = $ 10000, Rise in Basis Points = 15 bps, New Yield = 2.45 + 0.15 = 2.6 %, Tenure = 74 days

New Bond Price = 10000 x [1-(0.026) x (74/360)] = $ 9946.56

(c)

Face Value = $ 10000, Bond Price = $ 9936.66, Tenure = 63 days, let the YTM be y

New Bond Price = 10000 x [1-(y) x (63/360)] = $ 9936.66

y = 0.03619 or 3.619% ~ 3.62 %