1. Bond prices, yield to maturity, and returns (40 points) Walk through details of bond YTM, price:

You are considering a Treasury note that matures in 7 years, has a coupon of 1.75%, makes semiannual coupon payments, and has face value of 1000. The bond cash flows are summarized in the file PS4.xls.

Note: The numbers are based on an issued (2013) 7-year U.S. Treasury note maturing 10/31/2020. The data is from October 2013 (WSJ, see lecture 14). For this questions, assume that this bond's maturity is exactly 7 years (instead of slightly less than 7 years).

1. What are the bond's cash flows?

1. If the bond's yield was equal to 1.75% what would the price be?

1. Currently, the yield to maturity on the bond is 1.46% (Nov 1, 2013).
2. What is the per-period yield that you use to discount the bond's cash flows?

1. What is the present discounted value of the coupon payments? What is the present discounted value of the principal? (Note: Please use the formulas from class and show your work. You can then check your results using the Excel spreadsheet, below; or calculator)

1. What is the price of the bond and what is the quoted price of the bond (price as percent of par)?

1. Is the bond currently trading at a premium or at a discount? Why? Will the bond price rise or fall if in one year if the yield to maturity on the bond remains the same?

1. Market conditions change and the bond price (quoted as a percentage of par) is now equal to 100.99. What is the new yield to maturity? To figure this out you can use the spreadsheet PS4.xls. Use the solver to set the price difference equal to zero by changing the yield to maturity (just click on the solver; it is set up to do this for you).

1. Did the price increase or decrease (compared to the price in e.)? Is the yield to maturity higher or lower than the yield in c.?

1. You think that interest rates will increase/decrease over the next 6 months. Calculate the price of the bond if in six months the yield to maturity of the bond is equal to 1.5% or 1.3%

1. What is the return on your investment over the six months (assuming that you bought at the price in e.)? HOW would annual return Change IF you put down only 20% equity and borrowed the rest. (Calculate Return on equity)

1. What would the return on the bond be if the yield stays the same and is equal to 1.46%?