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Determine the market price of note

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1. The Treasury offers a $10,000 face value 10-year government note with an annual coupon rate of 1.00% (paid semi-annually) to the market.

a. Determine the market price of this note if its yield to maturity is 0.75% APR.

b. Explain why the note is selling for a price different from its face value.

c. Suppose one year later (immediately after the second coupon payment) the market yield on this security is 1.55% (APR). At what price is the note selling for in the market now? (Note: it is now a 9-year note)

d. Calculate the capital gain/loss (% change in price - ignore coupons) between year 0 and year 1 for an individual that purchased the note at its issuance.

e. If the note was stripped of its coupon payments so that its only cash flow was the face value payment at maturity, determine the value of this (zero coupon) note at issuance if the market yield for a single 10-year ahead cash flow is 0.875% (APR).

Reference no: EM132646711

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