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Recitation Notes 1.pdf - Recitation Notes#1 Mai Li1 1...

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Recitation Notes #1 Mai Li 1 02/02/2018 1. Treasury Bill a) Treasure Bills are generally considered as risk-free, its price reflects value of time. b) Bill price is quoted by yield. c) The difference between asked and bid price consitutes dealer’s profit. d) Yields are usually annualized, which means maturity needs to be considered when calculating discount. e) Treasury bill is short-term bond with no coupon. We use bank-discount method to convert between bill price and the yield 𝑝 𝑏𝑖𝑙𝑙 = ?𝑉 ⋅ (1 − 𝑦𝑖??? ⋅ ?𝑇𝑀 360 ) 2. Bond Price and Yield to Maturity a) YTM is applied to complex bond instrument featured by longer maturity and coupon payment. b) YTM for Zero Coupon Bond A ZCB that pays $100 in T year has a price of 𝑝 . Its yield to maturity is given by 𝑝 = 100 (1 + 𝑦) 𝑇 𝑦 = √ 100 𝑝 𝑇 − 1 Price and Yield to Maturity are inversely related. c) YTM for Coupon-Bearing Bond (not required) Suppose a bond that pays coupon c annually and pays principal in T year has a price of 𝑝 . Its yield to maturity is given by 1 Email: [email protected]
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