Fixed Income Securities Test 2 (Answered) Complete Solution

Fixed Income Securities Test 2 (Answered) Complete Solution Assume you purchased Treasury bond on November 14, with an annual coupon rate equal to 15%. At settlement you must pay accrued interest equal to $2.51. Assuming there are 182 days in a coupon period, how many days were in the AI period? Coupon of 15% = $15 per $100 of par Coupon interest per day = 15 / 364 = .0412 $2.51 / .0412 = 61 days Which of the following statements is FALSE? - all coupon treasury security can be created STRIPs - Treasury STRIPs were created due to demand for long term zero coupon with no credit risk - Treasury strips are uniquely attractive to US investors due to their preferential tax treatment False = Treasury strips are uniquely attractive to US investors due to their preferential tax treatment Their tax treatment is not preferred it is actually bad because you can be paying out tax even though you are not receiving cash flow Price of a bond quoted as: 96-14 96 + 14/32 = 96.4375 Price of a bond quoted as: 96.14 96 + 14/32 = 96.4375 Price of a bond quoted as: 96.14+ 95 + 14/32 + 1/64 = 96.453125 Price of a bond quoted as: 96.141 96 + 14/32 + 1 / 256 = 96. Price of a bond quoted as: 96.142 96 + 14/32 + 2/256 = 96.4453125 Assuming the quoted price for a $100,000 par value treasury coupon is 104.037, the dollar price of this security is closest to? 104 + 3/32 + 7/256 = 104.12109 104.12109 * 1,000 = 104,121.09 When comparing US Treasury Bills with Treasury Notes and bonds, it is customary to express the T-bill at its? Bond-equivalent yield Bond Equivalent yield = Bond Equivalent Yield = Discount / Price * 365 / Days to Maturity The price of a treasury bill with 180 days to maturity and $1 million face value is 965,000. The bank discount basis yield for this security is closest to? Bank Discount Yield = (Dollar Discount / Face Value) * (360 / t) Where Dollar Discount = Face Value - Price Bank Discount Yield = .035 * 360/180 = .07 or 7% Formula for the Bank Discount Yield Bank Discount Yield = Dollar Discount / Face Value * 360 / Days to Maturity Where Dollar Discount = Face Value - Price Assume that on Jan 1, you purchased a 10 year treasury inflation protected security (TIPS) with a 3% semiannual coupon, and a par value of $100,000. Then, after the first 6 months, the annualized inflation rate was 1.5%, your first coupon receipt will be closest to? Inflation adjusted principal = 100,000 * 1.075 = 100,750 Inflation Adjusted Principal * semi annual rate = next coupon payment semi annual rate = 3% / 2 = 1.5% 100,750 * .015 = 1,511.25 The bond described below is selling for settlement on 16 June 2014 - Annual Coupon = 6% - Coupon payment frequency = 10 April and 10 October - Maturity date = 10 October 2016 - Day Count Convention = 30/360 - Annual yield to maturity = 4% The accrued interest per 100 of par value for Bond G on the settlement date of 16 June 2014 is closest to? April 10 to June 16th = 66 days 6 / 360 = .01667 interest per day .01667 * 66 = $1.1 accrued interest per 100 dollars of par The WI (When Issued) Market is part of the ____________ market and its transactions are settled only ___________ The WI (When Issued) Market is part of the secondary market and its transactions are settled only after they are issued Suppose a Treasury Bill with a face value of $100,000 is selling for $95,400 and is maturing in 125 days, A $100,000 CD with 125 days to maturity is trading at a 15% discount. Which of these securities has the lower price? It is the CD because they tell you that the CD is trading at a 15% discount. As $100,000 par Treasury bond is quoted at a price of 112-18+. The price of this bond as a percent of its par value is closest to? 112 + 18/32 + 1/64 = 112 + .5625 + .015625 = 112.5781 Treasury Bill traits - issued at a discount to par - no coupon payment - mature at par value - Current practice is for the treasury to issue them with a maturity of 1 year or less TIPS, what is the real rate? The coupon rate TIPS inflation adjusted principal The coupon payment and maturity value are based on the inflation adjusted principal Treasury Note - Pays a coupon - Issued at approximate to par - 2-10 years to maturity Treasury Bond - Pays a coupon - Issued at approximate to par - Greater than 10 years What happens to a TIPS principal payment if there is deflation? It would still pay at the original par value because the Treasury has structured these instruments so that they are redeemed at at least par What is the purpose of the daily index ratio? The purpose of the daily index ratio is to help compute an inflation-adjusted principal for a settlement date. The inflation-adjusted principal is defined in terms of an index ratio, which is the ratio of the reference CPI for the settlement date to the reference CPI for the issue date. How is interest income on TIPS treated at the federal income tax level? For TIPS, the coupon payment is based on the inflation-adjusted principal. The U.S. government taxes the adjustment each year. This feature reduces the attractiveness of TIPS as investments in accounts of tax-paying entities. What is the when-issued market? Treasury securities are traded prior to the time they are issued by the Treasury. This component of the Treasury secondary market is called the when-issued market When-issued trading for both bills and coupon securities extends from the day the auction is announced until? The day the auction is announced until the issue day Why do government dealers use government brokers? They use interdealer brokers because of the speed and efficiency with which trades can be accomplished. The bid and ask yields for a Treasury bill were quoted by a dealer as 5.91% and 5.89%, respectively. Shouldn't the bid yield be less than the ask yield, because the bid yield indicates how much the dealer is willing to pay and the ask yield is what the dealer is willing to sell the Treasury bill for? The higher bid means a lower price. So the dealer is willing to pay less than would be paid for the lower ask price. This is how he makes his money For a Treasury auction what is meant by a noncompetitive bidder? A noncompetitive bidder is a bidder is who is willing to purchase the auctioned security at the yield that is determined by the auction process. They specify the amount sought but not the price. The quantity in a noncompetitive bid may not exceed $1 million for Treasury bills and $5 million for Treasury coupon securities. For a Treasury auction what is meant by a competitive bidder? A competitive bid specifies both the quantity sought and the yield at which the bidder is willing to purchase the auctioned security. For a Treasury auction what is meant by the high yield? This is the highest yield (or lowest bond price) at which the treasury is willing to sell the issue Bidding case for a competitive bidder: Suppose that $4 billion was tendered for at the high yield but only $3 billion remains to be allocated after allocating to all bidders who bid lower than the high yield. Then each bidder who bid the high yield will receive? So, if an entity tendered for $5 million, then that entity would be awarded? suppose that $4 billion was tendered for at the high yield but only $3 billion remains to be allocated after allocating to all bidders who bid lower than the high yield. Then each bidder who bid the high yield will receive $3 billion / $4 billion = 0.75 = 75% of the amount for which they tendered. So, if an entity tendered for $5 million, then that entity would be awarded only 0.75($5 million) = $3.75 million. In a Treasury auction, how is the price that a noncompetitive bidder must pay determined in a single-price auction format? All bidders are awarded securities at the highest yield (or lowest price) of accepted competitive tenders In a single-price auction, all bidders are awarded securities at the highest yield of accepted competitive tenders (i.e., the high yield). This type of auction is called a? dutch auction