You observe the following on-the-run Treasury securities in the market: 1. 6-month Treasury bill yields 5.25% p.a. 2. Two-year Treasury note coupon 6.00% p.a. 3. Five-year Treasury note with coupon 7.5% p.a. Assume all Treasury securities with maturity over 6-month have par of 100 and pay semi- annually. A. Using above information to fill in the missing observations in the theoretical spot rate curve below. Year (Period) Yield to Maturity (%) Spot Rate (%) 0.5 (1) 5.25 1.0 (2) 1.5 (3) 2.0 (4) 2.5 (5) 3.0 (6) 3.5 (7) 4.0 (8) 4.5 (9) 5.0 (10) 6.00 7.50 ? 6.82 7.10 7.38 7.67 B. A 4% 2-year Treasury note is trading at $95, is there an arbitrage opportunity? If so, what is your arbitrage strategy and what is your expected profit? C. What is the market consensus of the spot rate after 4.5 years? A 8 % 10-year Treasury bond is trading at $96 at the moment. Assume all your coupon income can be reinvested at 8.5% for the next five years. Based on the remaining coupon payments, what will be your holding period return over 5-years on this bond if market interest rate stays constant at the forecasted level after 5 years?
You observe the following on-the-run Treasury securities in the market: 1. 6-month Treasury bill yields 5.25% p.a. 2. Two-year Treasury note coupon 6.00% p.a. 3. Five-year Treasury note with coupon 7.5% p.a. Assume all Treasury securities with maturity over 6-month have par of 100 and pay semi- annually. A. Using above information to fill in the missing observations in the theoretical spot rate curve below. Year (Period) Yield to Maturity (%) Spot Rate (%) 0.5 (1) 5.25 1.0 (2) 1.5 (3) 2.0 (4) 2.5 (5) 3.0 (6) 3.5 (7) 4.0 (8) 4.5 (9) 5.0 (10) 6.00 7.50 ? 6.82 7.10 7.38 7.67 B. A 4% 2-year Treasury note is trading at $95, is there an arbitrage opportunity? If so, what is your arbitrage strategy and what is your expected profit? C. What is the market consensus of the spot rate after 4.5 years? A 8 % 10-year Treasury bond is trading at $96 at the moment. Assume all your coupon income can be reinvested at 8.5% for the next five years. Based on the remaining coupon payments, what will be your holding period return over 5-years on this bond if market interest rate stays constant at the forecasted level after 5 years?
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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Transcribed Image Text:You observe the following on-the-run Treasury securities in the market:
1. 6-month Treasury bill yields 5.25% p.a.
2. Two-year Treasury note coupon 6.00% p.a.
3. Five-year Treasury note with coupon 7.5% p.a.
Assume all Treasury securities with maturity over 6-month have par of 100 and pay semi-
annually.
A. Using above information to fill in the missing observations in the theoretical spot rate
curve below.
Year (Period) Yield to Maturity (%) Spot Rate (%)
0.5 (1)
1.0 (2)
1.5 (3)
2.0 (4)
2.5 (5)
5.25
5.25
6.00
3.0 (6)
3.5 (7)
6.82
4.0 (8)
4.5 (9)
5.0 (10)
7.10
7.38
7.50
7.67
B. A 4% 2-year Treasury note is trading at $95, is there an arbitrage opportunity? If so,
what is your arbitrage strategy and what is your expected profit?
C. What is the market consensus of the spot rate after 4.5 years? A 8% 10-year Treasury
bond is trading at $96 at the moment. Assume all your coupon income can be
reinvested at 8.5% for the next five years. Based on the remaining coupon payments,
what will be your holding period return over 5-years on this bond if market interest
rate stays constant at the forecasted level after 5 years?
inin
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