1. Suppose a commercial bank wants to buy Treasury bills. If you know that these instruments pay €5.000 in a year and currently sell for €5,012. Which is the yield to maturity of these bonds? Is this a typical situation? Because? 2. A government bond of face value £1,000 has a coupon rate 2%, its current price is £1. 100 and its price is expected to increase

1. Suppose a commercial bank wants to buy Treasury bills. If you know that these instruments pay €5.000 in a year and currently sell for €5,012. Which is the yield to maturity of these bonds? Is this a typical situation? Because? 2. A government bond of face value £1,000 has a coupon rate 2%, its current price is £1. 100 and its price is expected to increase

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

1. Suppose a commercial bank wants to buy Treasury bills. If you know that these instruments pay €5,000 in a year and currently sell for €5,012. Which is the yield to maturity of
these bonds? Is this a typical situation? Because? 2. A government bond of face value £1,000 has a coupon rate 2%, its current price is £1,100 and its price is expected to increase
to £1, 150 next year. Calculate the current coupon yield, the rate expected capital gain (only taking into account prices) and total return expected (capital gains and coupon gains).

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ABC Co. has a large amount of variable rate financing due in one year. The management is concerned about the possibility of increases in short-term rates. Which would be an effective way of hedging this risk?a. Buy Treasury notes in the futures market.b. Sell Treasury notes in the futures market.c. Buy an option to purchase Treasury bonds.d. Sell an option to purchase Treasury bonds
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