Question

1. Currently a 20-year Treasury bond with 4% semiannual coupon is traded at a yield of 5% (APR).

   1. (1) Is the price above or below 100?

   2. (2) Calculate the current price of the bond.

   3. (3) If the yield increased by 0.1%, how much would the price change? Would the price increase or

      decrease?

Answer 1

(1) The price of the bond is below 100 as the yield is greater than the coupon.

(2)

cpn = 4% * 100 / 2 = 2

n = 20 * 2 = 40 payments

r = 5% / 2 = 2.5% semiannual rate

(3) If the yield increases, then the price decreases.

New yield = 5.1% apr = 2.55% semiannual