Question

Please solve for the value of the following bonds and briefly explain your results:

A) A U.S. Government Treasury Strip is quoted in the Wall Street Journal at a market price of 87:19 (87 and 19/32). If the strip is scheduled to mature in May 2025, what is the annual interest rate for this bond?
B) Xenor Corporation introduced a bond in 2001 that offered a coupon rate of 8 1/2%, resulting in coupon payments of $8.50. The bond is scheduled to mature in 2031. If the current going interest rate in the market is 6 3/4%, what is the market price (please calculate the interest and the principal due to get this value) of this bond today?
C) A bond offers a coupon that makes annual payments of $87.50. The bond was originally set to mature in 17 years. A quote for this bond, obtained 15 years after the original issue date, listed the market price as $1,070.00. What is the YTM for this bond?

Answer 1

To calculate the annual interest rate for the bond, we need to convert the market price into a decimal. The bond is quoted at 87:19, which means the market price is 87.5938. Using the formula: bond price = coupon payment / (1 + interest rate)^(number of periods), we can find the annual interest rate to be approximately 1.68%.

Step-by-step explanation:

A) U.S. Government Treasury Strip

To calculate the annual interest rate for the bond, we need to convert the market price into a decimal. The bond is quoted at 87:19, which means the market price is 87 + 19/32 = 87.5938.
To find the annual interest rate, we can use the formula: bond price = coupon payment / (1 + interest rate)^(number of periods). In this case, we know the bond price (87.5938), the coupon payment (0), and the number of periods (4). Solving for the interest rate gives us an annual interest rate of approximately 1.68%.
Therefore, the annual interest rate for this bond is approximately 1.68%.

Answer 2

US Treasury Strip Price of the strip, P = $87 and 19/32 = $87.59375 Face Value of the strip = $100 Maturity, N = 5 years (assuming the quoted price is the current price, i.e., in November 2020, the time to maturity in November 2025 will be 5 years