This is ONE, multi-step question. Please show all steps and specify which part of the problem is being answered. If using excel, please list all steps/ formulas. (screenshots are also helpful!)
Question #3, Bond Pricing (25 points) At year 0, the U.S. Treasury auctions off a ten-year bond with a par value of $1000, and semi annual payment of $40 per share every six months. The auction price was at qo = $985 dollars per share. 1. Draw a timeline of the treasury bond's cash payouts. Denote the maturity of this treasury bond at time 0, as YTM" treasury 4. Solve for the yield to maturity. 2. In year 0, a large corporation auctioned off a ten-year bond with par value of $1000. The bond has an annual coupon rate of 6%; it pays out a coupon payment of $30 per share every six months. It is known that the implied yield to maturity of this corporate bond is 150 basis points above YTM treasury, at what price per share (denote it as po) can the company expect to sell the bonds to the public? 3. In year 1, after 2 semi-annual coupon payments were made, bad news on the US economy breaks out and bond investors "fly to safety" by selling the corporate bonds and buying treasury bonds. The corporate bonds were traded at p = $800 per share, while the treasury bond were traded at 91 = $995 dollars per share. (a) What's the year 1 YTM on corporate bond and treasury bond? (b) Suppose in year 0 an investor short sold 100 shares of treasury bond at price of qo, and use the proceeds to buy corporate bonds at price of po. Assume investors are allowed to buy fractional shares. The same investor then sells the corporate bond in year 1, using the proceeds from which along with his own funds to unwind his short position in treasury bonds. What is the realized cash return of his investments? (Hint: do not forget coupon payments!) Question #3, Bond Pricing (25 points) At year 0, the U.S. Treasury auctions off a ten-year bond with a par value of $1000, and semi annual payment of $40 per share every six months. The auction price was at qo = $985 dollars per share. 1. Draw a timeline of the treasury bond's cash payouts. Denote the maturity of this treasury bond at time 0, as YTM" treasury 4. Solve for the yield to maturity. 2. In year 0, a large corporation auctioned off a ten-year bond with par value of $1000. The bond has an annual coupon rate of 6%; it pays out a coupon payment of $30 per share every six months. It is known that the implied yield to maturity of this corporate bond is 150 basis points above YTM treasury, at what price per share (denote it as po) can the company expect to sell the bonds to the public? 3. In year 1, after 2 semi-annual coupon payments were made, bad news on the US economy breaks out and bond investors "fly to safety" by selling the corporate bonds and buying treasury bonds. The corporate bonds were traded at p = $800 per share, while the treasury bond were traded at 91 = $995 dollars per share. (a) What's the year 1 YTM on corporate bond and treasury bond? (b) Suppose in year 0 an investor short sold 100 shares of treasury bond at price of qo, and use the proceeds to buy corporate bonds at price of po. Assume investors are allowed to buy fractional shares. The same investor then sells the corporate bond in year 1, using the proceeds from which along with his own funds to unwind his short position in treasury bonds. What is the realized cash return of his investments? (Hint: do not forget coupon payments!)
