ARE143_CHAP_9_KEY

ARE143_CHAP_9_KEY - 1 Managerial Economics (ARE) 143...

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1 Managerial Economics (ARE) 143 University of California, Davis Instructor: John H. Constantine KEY —Chapter 9—Interest Rates Problem 1 : What is the price of a Treasury STRIPS with a face value of $100 that matures in seven years and has a yield to maturity of 5.6 percent? Price = $100 / (1 + .056/2) 2(7) = $67.9354 Price = $67.9354/$100 = 67.9354% Problem 2 : What is the price of a Treasury STRIPS with a par value of $100,000 that matures in seven years and has a yield to maturity of 6.9 percent? What is the quoted price? Price = $100,000 / (1 + 0.069/2) 2(7.5) = $60,123.27 = $60,123.27/$100,000 = 60.1233% or 60:04 Problem 3 : (a) What is the price of a U.S. Treasury bill with 84 days to maturity quoted at a discount yields of 4.70 percent. Assume a $1 million dollar face value. Daystomaturity Price FaceValue x 1 x Discount yield 360     d = .047 = [($1M – P )/$1M](360/84) ; P (b) What is the bond-equivalent yield? y = [365(.047)]/[360 – (84)(.047)] = 4.818% Problem 4 : U.S. Treasury STRIPS, close of business February 15, 2006: Maturity Price Maturity Price Feb07 95:21 Feb10 81:10 Feb08 90:27 Feb11 76:05 Feb09 85:24 Feb12 71:18 (a) Calculate the quoted yield for each of the STRIPS given in the table above. Does the market expect interest rates to go up or down in the future?
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This note was uploaded on 01/13/2012 for the course ARE 143 taught by Professor Brinkley,g during the Spring '08 term at UC Davis.

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ARE143_CHAP_9_KEY - 1 Managerial Economics (ARE) 143...

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