Question

Use the In the News to answer three questions

IN THE NEWS Treasury Prices Fall with Improved Expectations Expectations of accelerated economic growth continue to boost yields on Treasury securities. The price of the Treasury's 2.0 percent 10-year bond fell $17.43 yesterday, from $843.88 to $826.45. The decline in the price of the treasury pushed the yield up from 2.37 percent to 2.42 percent. The 30-year bond also declined, increasing the yield from 2.96 to 3.00. Source: Market reports of January 6, 2017, What would the yield be on the 2.0 percent, $1,000, 10-year Treasury bond if the market price of the bonds were Instructions: Round your responses to two decimal places.
a. $1,000?
b. $800?
c. $1,200?

Answer 1

2%

2.5%

1.67%

Step-by-step explanation:

The yield can be computed using the yield formula which coupon payment divided by price.

The coupon payment=face value*coupon rate

face value is $1000

coupon rate is 2%

coupon payment=2%*$1000=$20

when price is $1000:

yield =$20/$1000=2%

when price is $800

yield=$20/$800=2.5%

when price is $1,200

yield =$20/$1,200=1.67%

In essence ,the lower the price the higher the yield as lower amount is invested in order to receive the same amount of annual coupon of $20