Question

Suppose a US Treasury has 5% coupon, a face value of $1,000, and 2yrs to maturity. What is the price if similar bonds yield 1%, 5%, or 7%?

Answer 1

Sol:

Face value (FV) = $1000

Annual coupon rate (PMT) = 5%, Annual coupon payment = 1000 x 5% = $50

Period (NPER) = 2 years

Yield (Rate) = 1%, 5%, 7%

To determine Price of the US Treasury we can use PV function in excel:

i)

Bond Yield = 1%
FV	1000
PMT	50
NPER	2
Rate	1%
PV	$1,078.82

Price of the US Treasury with 1% yield will be $1,078.82

ii)

Bond Yield = 5%
FV	1000
PMT	50
NPER	2
Rate	5%
PV	$1,000.00

Price of the US Treasury with 5% yield will be $1,0000

iii)

Bond Yield = 7%
FV	1000
PMT	50
NPER	2
Rate	7%
PV	$963.84

Price of the US Treasury with 7% yield will be $963.84

Workings