Here the rates are all expressed as an APR with semi-annual compounding. Maturity (years) rate on 2/18/21
Question:
Here the rates are all expressed as an APR with semi-annual compounding.
| Maturity (years) | rate on 2/18/21 | rate on 2/18/22 |
| 1 | 0.06% | 1.09% |
| 9 | 1.19% | 1.99% |
| 10 | 1.34% | 2.06% |
(a) Find the price on 2/18/21 of a 10-year zero coupon bond with face value of $100. That is, what is the market price that you would have needed to pay 2/18/21 for a bond (backed by the Treasury) that pays you $100 on 2/18/2031.
(b) Suppose that last year on 2/18/21, you purchased $5,000 in face value of zero coupon bonds that mature on 2/18/2031.
(i) How much did you pay to buy the bonds?
ii) Suppose that after buying the 10-year bonds on 2/18/21, you sold it on 2/18/22.
What would the return (in percent) have been for this strategy?
(c)Suppose that instead of the strategy you used in (b), you decided to invest the same amount in 1-year T-bills (which are zero coupon) on 2/18/21. What would the return (in percent) be on your investment over the one year?
Expert Answer:
a The price of a zero coupon bond is determined by discounting its face value back to the present us... View the full answer
