Bond	Coupon	Maturity	Asked	Ask Yield	Months to maturity
1	1.250	2021 Nov 01	99.872	1.31	26
2	1.50	2024 Sept 01		1.248	60
3	2.000	2051 Dec 01	116.766	1.357	387

1. For each of the Government bonds and notes listed above, calculate the current yield (based on the asked price) and show how it differs from the yield to maturity.

When is the current yield a good approximation of the yield to maturity?

When answering questions 2 - 4 assume you bought each of these bonds on September 1, 2018 at the stated asked price.

Notes

1: I recommend using the Excel PV function to answer the next three questions. The Excel function to calculate the present value is:

=PV(rate,nper,pmt,fv)

Where rate is the yield to maturity, nperiod is the number of months to maturity, pmt is the coupon payment, and fv is the face value of the bond.

2: Notice that the coupon and the yield to maturity are reported on an annual basis whereas the term to maturity is reported as months to maturity. For best results, change the coupon payments and the yield to maturitys basis from annual to monthly. In other words, divide the term to maturity and the coupon amount by 12.

3: Set the face value (fv) equal to 100.

4: As an example, suppose you wanted to know the price of a bond with a coupon rate of 3.00% ($3 per $100 face value), a face value of $100, that matures in 63 months (5.25 years), and a yield to maturity of 3.25%.

The price of this bond would be:

=abs(pv(rate,nper,pmt,fv)) =abs(pv(.0325/12, 63, 3/12,100)) =$98.795

2. Suppose you purchased the above three bonds at the prices listed above on September 1, 2019. In addition, assume it is now 1 year later (September 1, 2020) and you want to sell these bonds. If interest rates were to increase by one-half a percentage point (50 basis points) over the year, at what price would you be selling these bonds for? If interest rates were to increase by a full percentage point (100 basis points), at what price would you sell these bonds for?

3. Using 2s results, calculate the percentage change for each bonds price for both the half-percentage point change and the one-percentage point change.

4. Using your answers from 3, calculate the return you would have earned for each of the above 3 bonds if you had held them for one year.

5. Go to https://www.oanda.com/forex-trading/analysis/economic-indicators/canada/rates/yield-curve and access the yield curve for September 25, 2019.

1. On September 25^th , what were the interest rates for the 1-year, 2-year, and 3-year Treasury securities?
2. Assume the expectations theory is the correct theory of the term structure. What do financial markets expect the one-year interest rate one year from now (ie1,t+1) to equal? What do financial markets expect the one-year interest rate two years from now (ie1,t+2) to equal?

Answer Sheet

Please fill in the table.

1.

Bond	Current Yield
1
2
3

2

Bond	New price of bond in 2012 if interest rates increase by 50 basis points during the year.	New price of bond in 2012 if interest rates increase by 100 basis points during the year.
1
2
3

3.

Bond	%DP if interest rates increase by 50 basis points during the year.	%DP if interest rates increase by 100 basis points during the year.
1
2
3

4

Bond	Return if interest rate increase by 50 basis points during the year.	Return if interest rate increase by 100 basis points during the year.
1
2
3

5a.

	Current Interest rate
1-yr Bond
2-yr Bond
3-yr Bond

5b.

	Expected interest rate
1-year from now
2-years from now