Question

You find a zero coupon bond with a par value of $10,000 and 17 years to maturity. If the yield to maturity on this bond is 4.9 percent, what is the price of the bond? Assume semiannual compounding periods.

Suppose the real rate is 1.9 percent and the inflation rate is 3.1 percent. What rate would you expect to see on a Treasury bill?

 

AS A EXCEL FORMULA

Answer 1

2]

Price of bond is calculated using PRICE function in Excel.

Settlement = settlement date

Maturity = maturity date

rate = coupon rate

yld = yield to maturity

redemption = redemption value (% of par)

frequency = number of compounding periods per year

By inputting the values into this function, we get the bond price per $100 of par value.

As the par value of this bond is $10,000, we multiply the answer by 100 ($10,000 / $100)

The price of the bond is $4,391.30

=PRICE(B1,B2,B3,B6,B5, B4)*100 B 1/1/2000 1/1/2017 0.00% 1 Settlement date 2 Maturity date 3 Coupon rate 4 Coupons per year 5 Redemption value (% of par) 6 Yield to Maturity 7 Par value 8 Price 100 4.90% $10,000 $4,391.30

4]

Treasury rate = ((1 + real rate) * (1 + inflation rate)) - 1

Treasury rate = ((1 + 1.90%) * (1 + 3.10%)) - 1

Treasury rate = 5.06%

B16 1 x fc = (1+B14)*(1+B15)-1 14 Real Rate 15 Inflation 16 Treasury Rate 1.90% 3.10% 5.06%