3. Today is January 1, 2020, and you obtain the following quotes from the Wall Street...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
3. Today is January 1, 2020, and you obtain the following quotes from the Wall Street Journal for several traded Treasury bonds with different maturities and coupon rates. Assume that coupons are paid semi-annually (so you don't have to worry about accrued interest) and that you are able to sell/buy at the quoted bid/ask prices. Face value of all bonds is $100. Table 1: Treasury Quotes - January 1, 2020 Maturity Coupon (%) Bid Ask 3/31/2020 0.50 99.75 99.85 6/30/2020 1.00 98.25 98.65 9/30/2020 2.00 98.80 99.15 12/31/2020 3/31/2021 1.50 97.30 98.50 3.00 101.45 101.95 (a) You short sell a Treasury bond with a maturity of 12/31/2020, and then close your short position 6 months later, right after collecting the coupon payment. Suppose that the bid-ask quotes for that bond in 6 months is 98.60 -99.05. What is your holding period return on the bond? (b) Using the bonds in Table 1, build a portfolio that replicates the cash-flows of a zero- coupon bond with a maturity of 9/30/2020. (c) What does it cost to buy, and the proceeds received from selling, the replicating port- folio from part (b)? (d) Suppose you find a zero-coupon bond with a maturity of 12/31/2020 trading for bid- ask price of 98.45 - 98.65. Can you build an arbitrage strategy? In the affirmative, what is your profit your profit from the strategy? Describe your strategy carefully. 3. Today is January 1, 2020, and you obtain the following quotes from the Wall Street Journal for several traded Treasury bonds with different maturities and coupon rates. Assume that coupons are paid semi-annually (so you don't have to worry about accrued interest) and that you are able to sell/buy at the quoted bid/ask prices. Face value of all bonds is $100. Table 1: Treasury Quotes - January 1, 2020 Maturity Coupon (%) Bid Ask 3/31/2020 0.50 99.75 99.85 6/30/2020 1.00 98.25 98.65 9/30/2020 2.00 98.80 99.15 12/31/2020 3/31/2021 1.50 97.30 98.50 3.00 101.45 101.95 (a) You short sell a Treasury bond with a maturity of 12/31/2020, and then close your short position 6 months later, right after collecting the coupon payment. Suppose that the bid-ask quotes for that bond in 6 months is 98.60 -99.05. What is your holding period return on the bond? (b) Using the bonds in Table 1, build a portfolio that replicates the cash-flows of a zero- coupon bond with a maturity of 9/30/2020. (c) What does it cost to buy, and the proceeds received from selling, the replicating port- folio from part (b)? (d) Suppose you find a zero-coupon bond with a maturity of 12/31/2020 trading for bid- ask price of 98.45 - 98.65. Can you build an arbitrage strategy? In the affirmative, what is your profit your profit from the strategy? Describe your strategy carefully.
Expert Answer:
Answer rating: 100% (QA)
a Holding period return on the shortsold bond Initial sale Sell 1 bond at the ask price of 9850 Receive 9850 Coupon payment Receive coupon payment of 150 15 of 100 face value Closing the short positio... View the full answer
Posted Date:
Students also viewed these finance questions
-
Part A: Cost of Debt Kenny Enterprises has just issued a bond with a par value of $1,000, twenty years to maturity, and an 8% coupon rate with semiannual payments. a. What is the cost of debt for...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
What are decision support systems, and what role do they play in the business environment?
-
Match each of the numbered definitions with the correct term in the following list. Write the letter of your choice in the answer column. a. Champerty b. Exculpatory clause c. Franchisor d. Gambling...
-
a. Given the following information, construct an ANOVA table. Use Table 4. SST = 66.03; SSTR = 18.89; c = 4; n1 = n2 = n3 = n4 = 15 b. Perform an ANOVA test of mean differences at the 10%...
-
Universal Principles versus Culturally Determined Norms Explain whether the following financial tasks are actually guided by universal principles or culturally determined norms: a. Calculating the...
-
The following is the post-closing trial balance for the Whitlow Manufacturing Corporation as of December 31, 2010. The following transactions occurred during January 2011: Jan.1 Sold merchandise for...
-
Among all rectangles that have a perimeter of 64, find the dimensions of the one whose area is largest. Write your answers as fractions reduced to lowest terms
-
Crawford Corporation had pretax income of $900,000 in 2020. In 2020, two (2) temporary differences originated for Crawford as shown below. Item C For tax, revenue of $100,000 in 2020; For book,...
-
Should equal pay between different groups always be required? Why, or why not?
-
_____ identifies the major tasks, duties, and responsibilities that are components of a job.
-
Why is water often used as a solvent in extractive distillation?
-
Target Corp. is one of the major retailers in the United States, with more than 1,800 stores across the country. They employ people both at their retail storefronts, as well as in their distribution...
-
_____ identifies the qualifications of a person who should be capable of doing the job tasks noted in the job description.
-
bed ok Rooney Company, which expects to start operations on January 1, year 2, will sell digital cameras in shopping malls. Rooney has budgeted sales as indicated in the following table. The company...
-
Can partitioned join be used for r r.A s? Explain your answer
-
Peter Mullen says in an article sent in to the ASB, the following: the ASB advocates that all leasing type deals should essentially be accounted for in relation to the extent of asset and liability...
-
(a) When accounting for finance leases, accountants prefer to overlook legal form in favour of commercial substance. Required: Discuss the above statement in the light of the requirements of IAS 17...
-
On 1 January 20X8, Grabbit plc entered into an agreement to lease a widgeting machine for general use in the business.The agreement, which may not be terminated by either party to it, runs for six...
Study smarter with the SolutionInn App