Question

Turn back to Figure 2.3 and look at the Treasury bond maturing in November 2040.

a. How much would you have to pay to purchase one of these bonds?

b. What is its coupon rate?

c. What is the current yield (i.e., coupon income as a fraction of bond price) of the bond?

Short answer

a. $980

b. $42, 70 annually and $21.35 semi-annually

c. 4.35%

Step-by-step solution

Definition

The treasury bonds are long term securities issued by government

Solution for ‘a’

Bond’s price = Asked price quote % x Par value

= 98.0000% x $1000

=$980

Solution for ‘b’

b. The coupon rate is 4.270.

This implies coupon payments of $42, 70 annually and $21.35 semi-annually.

Solution for ‘c’

c. Current yield = Annual Coupon Income / Bond Price

Current Yield = 4.270/98.0000%

= 0.0435

= 4.35%