Ticonderoga Inverse Floating Rate Bond Questions

Exhibit 1 U.S. Treasury Yields for December 17, 2004

Maturity Yield

1 month 1.98%

3 month 2.21%

1 year 2.66%

2 year 3.00%

3 year 3.18%

5 year 3.54%

7 year 3.85%

10 year 4.16%

20 year 4.80%

Q1. Use Treasury yield curve in Exhibit 1 for this question. What is the current price of the 7.29% coupon Treasury bond that pays its coupon semi-annually, par value $100, and has two years to maturity? If there is not an exactly corresponding interest rate, you should use extrapolation method. Also, calculate yield-to-maturity (YTM) of the bond.

Q2. Assume the LIBOR rate is the same as the Treasury yield curve in Exhibit 1. What is the current price of the LIBOR floating rate bond that pays its coupon according to 6 month LIBOR rate, par value $100, and has two years to maturity? If there is not an exactly corresponding interest rate, you should use extrapolation method. Also, calculate yield-to-maturity (YTM) of the bond.

Q3. Assume the LIBOR rate is the same as the Treasury yield curve in Exhibit 1. What is the current price of the inverse floater in this case? (7.29% - LIBOR) Assume the bond that pays its coupon according to 6 month LIBOR rate, par value $100, and has two years to maturity. If there is not an exactly corresponding interest rate, you should use extrapolation method.