Question

10. Consider the following U.S. Treasury bond quotation from The Wall Street
Journal. It is June 27, 2020. The bond has a $1,000 face value and pays semiannual
coupons.
Maturity Coupon Bid Asked Chg AskedYld
06/27/2027 3.675 76.1625 ????? +0.18 8.000
(a) (3 points) How much will an investor receive if he/she sells this T-bond?
(b) (4 points) Fill in the missing information for Asked?

Could you explain the question in detail with formula plz! I don't understand others poster answers.

Answer 1

Hi

Here Maturity = 06/27/2027

so bond's term = 2027 -2020 = 7 years

coupon rate = 3.675%

Bid Price = 76.1625

a) The price investors will receive = Bid price of bond = Face value * bid %

=1000*76.1625% = $761.625

b) Now we need to know ask price or (Price of Bond)

Coupons are paid semiannually

so Semiannual coupon = 1000*3.675%/2 = $18.375

Semiannual rate = yield = 8%/2 = 4%

Face Value of bond F = $1000

Period t = 7*2 = 14

Price P=?

Price = (C/r)*(1-(1+r)^-t) + F/(1+r)^t

=(18.375/0.04)*(1-1.04^-14) + 1000/1.04^14

=459.375*(1-0.577) + 1000/1.73

=194.097 + 577.475

=$771.5725

So Asked Price (missing information) = 771.5725/100 = 77.1572

Thanks