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FinanceQ&A LibraryYou are looking to purchase a 3.6% coupon bond (with semiannual coupons), par value ofonly $800, with a maturity of exactly 3 years. The next coupon payment will occur in 6months. You have the following information on the yield curve (APR8 compoundedannually):1.Maturity(in years)T-stripAPR2.0%0.597:241.01.596:122.02.7%2.52.85%3.02.95%What is the price of this bond?а.b. What is your estimate of the YTM of this bond (to within 0.1%)? Explain yourreasoning?You purchase the bond at the price you calculated in part (a). Immediately after thepurchase, the Federal Reserve issues a statement that spooks the bond market, andprices fall. You see that the YTM of the bond has jumped to 6.5% APR (compoundedannually). You decide that you should now sell this bond. What return would youhave earned on this bond during the brief period in which you owned it?с.Question

Asked Oct 29, 2019

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I still can't figure this question out. Is there anyone else that can look at it?

Step 1

As a first step we need to calculate the missing APR in the table.

Assuming half yearly coupn payments,

Price of T strip = 97.24 = 100 / (1 + r/2)^{2}

Hence, r = 2.82%

Price of T strip maturing in 1.5 years = 96.12 = 100 / (1 + r/2)^{3}

Hence, r = 2.66%

Step 2

Part (a)

Please see the white board. Price of the bond is present value of all the future payments derived using half year APR corresponding to a period, as discount rate of that period.

The price of the bond = $ 815.07 (please see the last row highlighted in yellow)

Step 3

Part (b)

C = semi annual coupon = 14.40

FV = 800; PV = 815.07; t = 2 x 3 = 6 half years

Hence, approximate and estimated semi annual YTM = [14.40 + (...

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