Consider a $1000 face value 3-year treasury with 2.5% annual coupon and a yield of 1.3%.

Suppose that after one year and after receiving one coupon payment, you decide to sell your treasury note. Consider the following two scenarios:

Scenario #1: interest rates have fallen to 1%.

Scenario #2: interest rates have risen to 2%.

a) Calculate the price that you can sell your treasury note for under scenario #1 and the associated rate of returnwhen you sell your treasury note given Scenario #1.

• Price = $
• Rate of return = %

b) Calculate the price that you can sell your treasury note for under scenario #2 and the associated rate of returnwhen you sell your treasury note given Scenario #2.

• Price = $
• Rate of return = %

Answer rating: 100% (QA)

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