For this question, assume all bonds make semi-annual coupon payments and interest compounds semi- annually. Also assume you are allowed to both buy and sell the different bonds, and the amounts you buy or sell of any given bond can be fractions of a bond, if needed. The following table shows 8/1/2018 prices for different US Treasury bonds with $1000 face values: Type of Bond A - US Treasury Bill maturing on 9/1/2018 B - US Treasury Bill maturing on 11/1/2018 C - US Treasury Bill maturing on 2/1/2019 D - US Treasury Bill maturing on 8/1/2019 E - US Treasury STRIP maturing on 2/1/2020 F - US Treasury 2% Coupon Note maturing on 8/1/2020 Price on 8/1/2018 $994.88 $989.10 $976.29 $962.92 $948.96 $980.73 a) (4 points) What is the yield-to-maturity of Bond D in the table above? b) (8 points) What should be the price of a Treasury bond with a coupon rate of 7%, face value of $1000, and 1 year left to maturity? How does the yield of this bond compare to the yield of the bond from part a)? (You do not need to actually compute the yield of this bond, just tell me whether it is greater than or less than the yield of the bond and part a) and how you came to that conclusion) c) (5 points) If you are worried that the 1.5 year spot rate (but none of the other spot rates) might increase unexpectedly, which bond should you purchase and why? d) (8 points) Suppose that on 8/1/2018, the City of Rochester issued a block of 2-year (maturing on 8/1/2020) 20% coupon bonds with a total face value of $1 million. Also, assume that the investors believe that the City of Rochester has zero credit risk (investors are certain that Rochester will actually pay out all of the cash-flows associated with this bond). Compute the amount of money that the City of Rochester was able to raise as a result of this issuance on 8/1/2018 assuming that there are no arbitrage opportunities. For this question, assume all bonds make semi-annual coupon payments and interest compounds semi- annually. Also assume you are allowed to both buy and sell the different bonds, and the amounts you buy or sell of any given bond can be fractions of a bond, if needed. The following table shows 8/1/2018 prices for different US Treasury bonds with $1000 face values: Type of Bond A - US Treasury Bill maturing on 9/1/2018 B - US Treasury Bill maturing on 11/1/2018 C - US Treasury Bill maturing on 2/1/2019 D - US Treasury Bill maturing on 8/1/2019 E - US Treasury STRIP maturing on 2/1/2020 F - US Treasury 2% Coupon Note maturing on 8/1/2020 Price on 8/1/2018 $994.88 $989.10 $976.29 $962.92 $948.96 $980.73 a) (4 points) What is the yield-to-maturity of Bond D in the table above? b) (8 points) What should be the price of a Treasury bond with a coupon rate of 7%, face value of $1000, and 1 year left to maturity? How does the yield of this bond compare to the yield of the bond from part a)? (You do not need to actually compute the yield of this bond, just tell me whether it is greater than or less than the yield of the bond and part a) and how you came to that conclusion) c) (5 points) If you are worried that the 1.5 year spot rate (but none of the other spot rates) might increase unexpectedly, which bond should you purchase and why? d) (8 points) Suppose that on 8/1/2018, the City of Rochester issued a block of 2-year (maturing on 8/1/2020) 20% coupon bonds with a total face value of $1 million. Also, assume that the investors believe that the City of Rochester has zero credit risk (investors are certain that Rochester will actually pay out all of the cash-flows associated with this bond). Compute the amount of money that the City of Rochester was able to raise as a result of this issuance on 8/1/2018 assuming that there are no arbitrage opportunities
