Treasury bond-premium or discount bond

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Reference no: EM131856729

1. The quote for a US Treasury bond maturing on Aug 15, 2026 (from the Wall Street Journal) is shown below. Is this a premium or a discount bond? What is its current yield?

Maturity Coupon Bid Asked Change Asked yield

8/15/2026 1.500 97.9219 97.9375 +0.1172 1.726

2. What maximum price would you pay for a standard 8% coupon bond (with semiannual payments and a par value of $1,000) that has 10 years to maturity if the prevailing discount rate (your cost of capital) is 10% per annum?

3. You are analyzing the following US corporate bonds and both are issued by the same company. (Hint: US corporate bonds pay interest semi-annually)

Bond Price (as % of par) Coupon (%) Maturity (years)

A 100.00 3 20

B 55.13 0 20

a. If interest rates move up by 0.5% (50 basis points),how much will the value of each bond change (in %)?

b. If you expect interest rate to fall over time, which bond would you invest in?

c. You decide to purchase $1,000,000 worth of bond B, if the par value of each bond is $1,000 how many bonds must you buy (ignore any transaction costs)?

d. If you invest in bond B, how much will it be worth 2 years later if the appropriate yield for this bond then is 3.5%?

Reference no: EM131856729

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