# Treasury Bonds and Notes

1) A six-month $10,000 Treasury bill is selling for $9,844. What is the annual yield according to the discount method? Does this yield understate or over-state the true annual yield? Explain

2) What is the current taxable equivalent yield for an individual in the 35% federal income tax bracket for intermediate bonds (10 or fewer yrs to maturity) and long-term bonds (30 yrs to maturity)?

3) The federal government issues two four-yr notes. The first is a traditional type of debt instrument that pays 6% annually ($60 per $1,000 note). The second pays a real yield of 3 % with the amount of interest being adjusted with changes in the CPI. The CPI was 100 when the notes were initially issued.

a) What is the annual amount of interest paid each year on each security if the CPI is as follows?

Yr CPI

1 102

2 96

3 103

4 110

b) What is the amount of principal repaid at maturity by each note?

c) Using the dollar-weighted return, what is the nominal, annual rate of return on each security?

d) Based on the answer to part (c) which alternative produced the higher return and why?

4) This problem illustrates "riding the yield curve", The U.S. Treasury issue a 10-yr, zero coupon bond.

a) What will be the original issue price if comparable yields are 6%? (Assume annual compounding.)

b) What will be the price of this zero coupon bond after 3, 6, and 9 yrs have passed if the comparable yield remains 6%? What are the annualized returns the investor earns if the bond is sold after 3, 6, or nine yrs?

c) When the bond was issued, the structure of yields was as follows:

Yrs to Maturity Yield

1 3

4 4

7 5

10 6

What will be the price of the bond after 3, 6, and 9 yrs have passed if this structure of yields does not change? What is the annualized return the investor earns if the bond is sold after 3, 6, or nine yrs?

d) If the structure of yields does change to the following:

Yrs to maturity Yield

1 2

4 3

7 4

10 5

What will be the price of the bond after 3, 6, and nine yrs have passed?

What is the annualized return the investor earns of the bond is sold after 3, 6, or 9 yrs?

e) If the structure of yields changes to the following?

Yrs to Maturity Yield

1 4

4 5

7 6

10 7

What will be the price of the bond after 3, 6, and nine yrs have passed?

What is the annualized return the investor earns of the bond is sold after 3, 6, or 9 yrs?

f) Why are the annualized returns different in part b-e?

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#### Solution Summary

Answers questions dealing with Treasury Bonds and Notes.

Yield Curve Analysis Of Bonds and Notes

Complete the following assignment by entering the information in an excel spreadsheet and using the graphing capabilities in Excel to create the yield curve. your conclusions may be typed into your Excel spreadsheet or separately in a Word file. Use different financial resources such as Yahoo Finance, Federal Reserve Bank website, MSN Money, CNN Money etc. and collect the following information: yield on: Treasury bills, Federal Funds rate, Treasury Notes (2 years, 5 years, 10 years maturity), Treasury Bonds, Municipal Bonds, and Corporate Bonds (AAA, AA, A, and BBB ratings). Draw a yield curve using treasury securities. From the shape of the yield curve, what conclusions would you draw about markets expectations about that future of the economy? Explain"

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