Question

The Treasury announces new issue of Treasury Bonds. Settlement date: 26.08.2020 Maturity date: 25.08.2023 Periodic coupon...

The Treasury announces new issue of Treasury Bonds.

Settlement date: 26.08.2020

Maturity date: 25.08.2023

Periodic coupon rate (6 months): 1,87%

Payment dates:

26.02.2021

27.08.2021

25.02.2022

26.08.2022

24.02.2023

25.08.2023

Market rates:

1 Month: 0.7%

3 Months: 1%

On the new issuance, Market is expecting 25bp premium to secondary market. What would be the expected auction yield/price of new treasury bond?

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Homework Answers

Answer #1

Lets say the face value of the bond is $1000 expected to be recieved on 25-08-2023

Issue price = Present value of lumpsum + Present value of interest payment

6 months market rate =( ((1/100) +1)^2) -1 = 2.01%

n = 2 * 3 = 6 (becuase marke rate is quaterly)

Present value of lumpsum = 1000/(1.0201)^6 = 887.45

Present value of interest payments

Interest every 6 months = 1.87% * 1000 = 18.7

PV of interest payment = 18.7 * (1 -(1 + 2.01%)^-6)/2.01%

= 104.71

Issue price = 887.45+104.71 = 992.16

Since premium of 25 basis point = 992.16 * 1.0025 = 994.6404

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