You are trading for settlement on 21 November 2016. You observe that the U.S. economy is approaching
Question:
You are trading for settlement on 21 November 2016. You observe that the U.S. economy is approaching full employment. The new President-elect promises to implement tax cuts and higher government spending. You decide to investigate a strategy to anticipate a higher yield on the 10-year maturity bond relative to the 2-year maturity bond
You observe the following information on 2-year and 10-year Treasury bonds trading in the market (semi-annual, actual/actual):
Bond 1: Treasury 0.75% 31 October 2018, Clean Price = 99.375 Yield (%) = 1.076
Bond 2: Treasury 2.0% 15 November 2026, Clean Price = 96.875, Yield (%) = 2.353
Both bonds have 181 days in the current coupon payment period. Assume a financing rate of 0.325% (actual/360) per annum. Calculate the forward prices and yields of the two bonds for settlement on 21 February 2017 (92 days).