ADM 3351 Lecture Notes - Lecture 11: Cash Flow, Day Count Convention, Credit Risk
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Go to the http://www.federalreserve.gov/releases/h15/data.htm to examine historical daily interest rates on U.S. Treasuries.
Scroll down to "Treasury constant maturities" and in the row "1-month" under "Nominal" click "Business day."
As you can see, rates on the one-month U.S. Treasury bill are provided for each business day from July 31, 2001 to the present. For this assignment you are asked to pick a business date five years ago this month. (For example, in January 2012 I would pick a business date in January 2007.)
Then, using this row and the subsequent rows below it under âTreasury Constant Maturitiesâ determine the shape of the yield curve (See Figure 6.11in the textbook for examples of Treasury yield curves) on that date five years ago based on the rates published by the Fed by completing the table below for the listed Treasury maturities (see example below):
Business Date Chosen Five Years Ago | 7/15/2010 |
1-month Nominal T-bill Rate on that Date | 0.16 |
3-month Nominal T-bill Rate on that Date | 0.15 |
6-month Nominal T-bill Rate on that Date | 0.2 |
1-year Nominal T-note Rate on that Date | 0.27 |
5-year Nominal T-note Rate on that Date | 1.76 |
10-year Nominal T-note Rate on that Date | 3 |
20-year Nominal T-bond Rate on that Date | 3.77 |
30-year Nominal T-bond Rate on that Date | 3.97 |
Answer the following questions:
On your selected date was the yield curve rising, falling, or flat? What explanation(s) would you give for this shape?
From my selected date, the yield curve is rising. This is due to the fact that the longer money is invested the more youâre compensated and earn due to the fact that the interest rates being higher.
Assume that two U.S. Treasury securities were purchased at par ($1000) on your selected date five years ago: 1) a 10-year T-note and 2) a 20-year T-bond. Also assume that for each of the two securities the reported nominal rate that you found above was the coupon rate at issuance.
Assuming semi-annual coupon payments, calculate the value of each bond today after 5 years based on the current 5-year Treasury constant maturity nominal rate for the original 10-year note and a current 15-year rate (assume it is the average of the current Treasury constant maturity nominal 10- and 20-year rates) for the original 20-year bond at http://www.federalreserve.gov/releases/h15/data.htm.
Complete the following tables (see example below):
10-Year Bond Purchased for $1000 5 Years Ago
Original Value | $1000 |
Coupon Rate (From table you completed above at the chosen date from 5 years ago, the original 10-year Nominal T-bond Rate divided by 2 for semi-annual payments) | |
Current 5-Year Yield to Maturity (The most recent 5-year Nominal T-note Rate reported at the Fed site divided by 2 for semi-annual payments) | |
Number of Semi-Annual Periods Remaining | |
Current Value* | |
Gain or Loss on the Bond over the 5 years |
20-Year Bond Purchased for $1000 5 Years Ago
Original Value | $1000 |
Coupon Rate (From table you completed above at the chosen date from 5 years ago, the original 20-year Nominal T-bond Rate divided by 2 for semi-annual payments) | |
Current 15-Year Yield to Maturity (Take the average of the most recent 10- and 20-year Nominal T-bond Rates reported at the Fed site, and then divide this average rate by 2 for semi-annual payments) | |
Number of Semi-Annual Periods Remaining | 30 |
Current Value* | |
Gain or Loss on the Bond over the 5 years |
*Current Value = PVBond = Coupon Payment +
b) Did you gain or lose more on one bond relative to the other? Explain.
Please can someone help me with this :
Minicase 1
Interest Rates, Bond Yields, and Duration
CONCEPTS IN THIS CASE
simple loans
fixed-payment loans
coupon bonds
present value
yield-to-maturity
current yield
nominal and real interest rates
rate of return
capital gain
interest-rate and reinvestment risk
duration
You have been hired to analyze the debt securities of your organization. The firm has outstanding loans and bonds. A quick review of the balance sheet shows the following:
Liability | Nominal | Years to | |
Selected Liabilities of the firm | |||
Simple Loans | 800 | 5% | 1 |
Fixed-Payment Loans | 5,000 | 12% | 19 |
Long-term Bonds #1 | 500,000 | 10% | 4 |
Long-term Bonds #2 | 1,080,000 | 10% | 10 |
Liabilities Total | 1,585,800 | ||
Market Price for Bond #1 | 930.50 | ||
Market Price for Bond #2 | 859.50 | ||
Face Value of Each Bond | 1,000.00 | ||
Selected Current Assets of the firm | |||
Marketable Securities: | |||
Treasury Bills | 100,000 |
Note: Treasury Bills have a $10,000 face value, which matures in one year. Each Treasury Bill has a cost of $9,580.00
How much interest would the firm pay each year on the simple-interest loan?
How much would you write a cheque for to pay off the loan in one year?
What is the monthly payment needed to pay off the fixed-payment loans?
What is the current yield for each bond if the current price is:
$930.50 for Bond #1?
$859.50 for Bond #2?
What is the expected yield to maturity for each bond?
Bond #1 selling for $930.50?
Bond #2 selling for $859.50
What is the rate of capital gain if both bonds sell for $900.00 in one year?
Bond #1 selling for $930.50 today?
Bond #2 selling for $859.50 today?
If the Yield to Maturity expected by investors changes to 11%:
What will be the market price of Bond #1?
What will be the market price for Bond #2?
What will be the dollar change in price for Bond #1?
What will be the dollar change in price for Bond #2?
What will be the percent change in price for Bond #1?
What will be the percent change in price for Bond #2?
Since the change in expected yield to maturity is the same, why is the amount of change different between the bonds?
If investors holding our 4-year bonds (Bond #1) receive interest income annually for four years, plus the face value of the bonds at maturity,
What will be the total interest earned on the bond over the next four years?
What will be the face value received at maturity?
Given the following projected income stream for Bond #1:
Projected Reinvestment Rates | ||||
Year | Coupon | Face | 10% | 5% |
1 | 100 | |||
2 | 100 | 10.00 | 5.00 | |
3 | 100 | 21.00 | 10.25 | |
4 | 100 | 1000 | 33.10 | 15.76 |
Total Income | 400 | 1000 | 64.10 | 31.01 |
What is the total cash available over the next four years to the bond holder earning
10%
15%
What is the average annual rate of return for the bond holder earning
10%
15%
Why does the reinvestment rate affect the annual rate of return for the same bond?
If the expected rate of return on our bonds is 10%, what is the duration of Bond #1?
What is the yield to maturity on the Treasury Bills (a discount bond)?
What is the real rate of interest if the nominal rate is 10% and the inflation rate is 3%?
Copyright © 2000â2001 Addison Wesley Longman, a division of Pearson Education
Adaptation copyright © 2002 Pearson Education Canada