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Assume six months ago the US Treasury yield curve was flat at a rate of 4% per year

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2. Assume six months ago the US Treasury yield curve was flat at a rate of 4% per year (assume semi-annual coupon payments and semi-annual compounding) and you bought a 30-year US Treasury bond. Today it is flat at a rate of 5% per year. What rate of return did you earn on your initial investment:
a. if the bond was a 4% coupon bond?
b. if the bond was a zero coupon bond?

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Solution Preview

Please see the attached file.

SOLUTION:

Step 1: Find prices of the bonds six months ago:

n i PV FV PMT Result
Coupon=4% 60 2 ? 100 2 PV =100
Zero ...

Solution Summary

The expert examines the United States treasury yielding a curve. This posting provides the solution to the student's problem.

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