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    Interest Rate Problems: Discount Prices

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    Nathan Wang
    This document discusses interest rate problems involving treasury bonds, zero-coupon bonds, spot rates, yields, and discount prices. It provides examples of calculating annual and semi-annual bond yields from ask prices, determining rates of return from purchase and sale prices of bonds, calculating spot rates from given discount prices, and using spot rates, yields and discount prices to value cash flows from bonds. It asks the reader to perform calculations involving treasury yields, spot rates, discount prices, and the valuation of cash flows received in the future.

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    Interest Rate Problems: Discount Prices

    Uploaded by

    Nathan Wang
    41 views3 pages
    This document discusses interest rate problems involving treasury bonds, zero-coupon bonds, spot rates, yields, and discount prices. It provides examples of calculating annual and semi-annual bond yields from ask prices, determining rates of return from purchase and sale prices of bonds, calculating spot rates from given discount prices, and using spot rates, yields and discount prices to value cash flows from bonds. It asks the reader to perform calculations involving treasury yields, spot rates, discount prices, and the valuation of cash flows received in the future.

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    Interest Rate Problems_revised

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    This document discusses interest rate problems involving treasury bonds, zero-coupon bonds, spot rates, yields, and discount prices. It provides examples of calculating annual and semi-annual bond yields from ask prices, determining rates of return from purchase and sale prices of bonds, calculating spot rates from given discount prices, and using spot rates, yields and discount prices to value cash flows from bonds. It asks the reader to perform calculations involving treasury yields, spot rates, discount prices, and the valuation of cash flows received in the future.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    41 views3 pages

    Interest Rate Problems: Discount Prices

    Uploaded by

    Nathan Wang
    This document discusses interest rate problems involving treasury bonds, zero-coupon bonds, spot rates, yields, and discount prices. It provides examples of calculating annual and semi-annual bond yields from ask prices, determining rates of return from purchase and sale prices of bonds, calculating spot rates from given discount prices, and using spot rates, yields and discount prices to value cash flows from bonds. It asks the reader to perform calculations involving treasury yields, spot rates, discount prices, and the valuation of cash flows received in the future.

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    © All Rights Reserved
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    Interest Rate Problems

    1. Suppose today is October 23rd 2020. You want to buy a treasury strip (treasury zero coupon
    bond) that matures on October 23rd 2032. You check the ask price and see that it is selling for
    $87.50.
    a. Calculate the ask yield of the bond assuming annual compounding?
    b. You wonder what rate of return you would earn each year if you buy this bond and hold it till
    maturity.
    c. If you buy this bond at $87.50 today and expect it to hold it till maturity, what rate of return are
    you expecting to earn over your holding period?
    d. If you hold this bond till maturity, are you exposed to interest rate risk?
    e. If you buy this bond at 87.50 and hold it till maturity, what will be your realized rate of return?
    f. If you buy 1 unit of this bond at $87.50, how much will the treasury pay you at maturity?
    g. What is the yield the maturity of this bond?
    h. What is the 12-year spot rate?
    i. What is the discount price of this bond?
    j. Calculate the ask yield of this bond assuming semi-annual compounding.

    2. Given the following discount prices

    Discount
    prices

    𝑑1 .90
    𝑑2 .80

    𝑑3 .70

    𝑑4 .60

    a. Calculate the annually compounded spot rates for year 1, 2, 3, and 4.


    b. What is the semi-annually compounded yield to maturity of the 2-year bond?

    3. Suppose you commit to buy a 4-year treasury bond at a discount price of $0.96 two years from now.
    What is the 4-year forward rate two-years from now?
    4. Today you buy Microsoft at $215.37. You intend to hold this stock for four years. In order for you to
    earn average 7% per year over the next four years (and receive no dividends) what price must you
    sell it for at the end of four years?
    5. You buy Microsoft at 215.37. Four years later you sell it for $265. What rate of return have you
    earned per year over your holding period?
    6. Given the following:

    23-Oct 2020
    Maturity Maturity Ask
    Year Date Bid Ask Yield
    1 8/15/2021 99.896 99.96 0.05
    2 8/15/2022 99.722 99.812 0.104
    3 8/15/2023 99.338 99.477 0.187
    4 8/15/2024 98.752 98.977 0.271
    5 8/15/2025 97.791 98.026 0.416
    6 8/15/2026 96.58 96.913 0.542
    7 8/15/2027 95.269 95.593 0.665
    8 8/15/2028 93.857 94.219 0.766
    9 8/15/2029 92.289 92.674 0.868
    10 8/15/2030 90.608 91.051 0.961
    11 8/15/2031 88.79 89.273 1.056
    12 8/15/2032 87.14 87.658 1.122
    13 8/15/2033 85.339 85.895 1.195
    14 8/15/2034 83.73 84.312 1.244
    15 8/15/2035 81.946 82.569 1.302
    16 8/15/2036 80.175 80.813 1.357
    17 8/15/2037 78.588 79.253 1.393
    18 8/15/2038 76.951 77.641 1.432
    19 8/15/2039 75.382 76.096 1.463
    20 8/15/2040 73.575 74.309 1.511
    21 8/15/2041 71.922 72.616 1.55
    22 8/15/2042 70.182 71.091 1.577
    23 8/15/2043 68.406 69.192 1.628
    24 8/15/2044 66.778 67.571 1.661
    25 8/15/2045 65.149 65.955 1.692
    26 8/15/2046 63.682 64.501 1.714
    27 8/15/2047 62.412 63.246 1.724
    28 8/15/2048 61.29 62.149 1.725
    29 8/15/2049 60.22 61.086 1.726

    a. What is the 10-year spot rate?


    b. What is the 5-year spot rate?
    c. What is the yield-to-maturity of a 6-year zero coupon bond?
    d. What is the discount price of a 20-year bond?
    e. Your relative promises to pay you $5,000, 12 years from now. What is the maximum
    amount you would lend to your relative today? Why?
    f. What is the present value of risk-free $1 to be received 15-years from now?
    g. The bond maturing on 8/15/2040 has an ask price of 74.309. Given this price show that
    the reported ask yield 1.511 is correct.

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