Question

You are considering buying a 10-year U.S. Treasury bond at the upcoming Treasury auction. Assume that...

You are considering buying a 10-year U.S. Treasury bond at the upcoming Treasury auction. Assume that the bond has the following features:

coupon rate: 3.88%, with semi-annual coupon payments

Face value: $1,000

matures in 10 years

In the auction, the annual yield to maturity determined by the auction is 2.51%.

What is the price that you will pay for this bond?

Do not round at intermediate steps in your calculation. Round your answer to the nearest penny. Do NOT include a minus sign! Do not type the $ symbol.

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Homework Answers

Answer #1

Face value = 1,000

Coupon payment = 0.0388 * 1000 = 38.8 / 2 = 19.4 ( since it is a semi annual bond, we divide by 2)

Number of periods = 10 * 2 = 20 ( since it is a semi annual bond, we multiply by 2)

Rate = 0.0251 / 2 = 0.01255 or 1.255%

Bond price = 19.4 * [ 1 - [ 1 / ( 1 + 0.01255)20]] / 0.01255 + 1000 / ( 1 + 0.01255)20

Bond price = 19.4 * [ 1 - 0.779239] / 0.01255 + 1000 / 1.283304

Bond price = 19.4 * 17.590518 + 779.23859

Bond price = 341.256049 + 779.23859

Bond price = 1,120.5

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