NOTES: Recall that: The settlement date is the date you would actually pay for a bond once you purchased it. Remember that US government bonds and notes pay the coupon on a semi-annual basis. QUESTION #1: (50 points: 10 points each) Please copy your Excel bond calculations under each relevant question. Do NOT submit your excel spreadsheet, only your word document with your name on it. a. The 30 year on-the-run Treasury bond expiring on February 15, 2041 with a 3% coupon has a yield of 4.76%. Calculate its price. (Hint: use the bond template sheet available on Reggie Net. Assume the bonds settlement date is June 26, 2016. b. A note is quoted at 102-15+ or 102-155. Translate this quote into dollars. c. Consider an original 2-year US Treasury note with a 4% coupon expiring on 06/15/2018. If this note actually sells at 101 in the bond market, what would be its yield to maturity? (Hint: use the bond template sheet available on Reggie Net. Assume the bonds settlement date is June 26, 2016. Remember that US government bonds and notes pay the coupon on a semi-annual basis) d. A treasury note with a coupon rate of 3% and expiring on February 15, 2018 has a current bid quote of 98-31. Another treasury note also expiring on February 15, 2018 offers a coupon rate of 5% and has a current bid quote of 99-01. Explain why these two treasury notes, which expire on the same date, pay a different coupon and therefore are offered at a different price. e. Albertson, Inc., a food company, recently issued a 2-year note that pays a 3% coupon rate (paid annually) and expires on February 15, 2018. The current price of this note is 100-05 (in points and fractions) What is this notes yield to maturity? (Once again, use the bond template sheet available on Reggie Net, and assume that the bonds settlement date is June 26, 2016) It is now one year later and market yields for bonds/notes with similar characteristics have risen to 3.5%. What should now be the (dollar) price of the Albertsons note? How do you explain the change of price from one year to the other? QUESTION #2: (50 points) 1) Calculate the modified duration of the following three bonds. Assume a settlement date of 6/26/2016 (20 points) BOND A BOND B BOND C COUPON RATE 1.5% 1.75% 2% YTM 1.6% 1.6% 2.1% MATURITY 11/15/2018 8/15/2022 2/15/2025 COUPON FREQUENCY 2 2 2 2) Calculate the modified duration of a portfolio composed of the three bonds, assuming that you invest 30% in bond A, 35% in bond B and 35% in bond C. (15 points) 3) Recently, the Federal Reserve System has announced that it will buy back Treasury bonds and notes and, in exchange, inject more cash into the economy. As a result, you expect that such action will lead to a decrease in the yield of each note and bond by 0.5%. Devise a numeric example that would help the manager of an actively managed portfolio of bonds to further enhance the gain in his portfolio that would result from falling Treasury bond and note yields (15 points) 3