Determine the discount factors

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Reference no: EM131532929

Fixed Income Assignment

Question 1 -

The bid rate of a Treasury bill is 0.94 % and the ask rate is 0.95 %. Note that the bid rate is higher than the ask rate. What are the dollar bid and ask prices, assuming face value of one million and a 91 day maturity? The face value is one million dollars. What is the difference between the dollar ask price and dollar bid price?

Would you prefer a Treasury bill quoted at 0.94 %, maturity 181 days, or a default free, zero coupon security paying a simple interest rate of 0.94 %? The face value is one million in both cases.

Assume an Actual/360 convention when computing the prices.

Question 2 -

For a particular instrument prices are quoted in terms of simple interest rates. For an instrument with a 29 day maturity, the quoted rate is 0.51%, assuming a 360 day year.

What is the quoted rate if a 365 day year is assumed? The face value of the instrument is $1 million. Please give your answer to four decimal places and in percentage form.

Question 3 -

The one year rate of interest is 0.59%, assuming annual compounding. The two year rate of interest is 0.56%, assuming annual compounding. What is the implied re-investment rate from year one to year two, so that you would be indifferent between investing for two years or for one year and reinvesting at the implied rate?

Question 4 -

Consider a Treasury note pays a coupon of $0.25 once a year. The maturity of the bond is four years and the face value $100.

Maturity (years)	Annual Rate of Interest (%)
1	0.76
2	1.01
3	1.10
4	1.38

Annual compounding is assumed.

1. Determine the discount factors.

2. Determine the value of the bond.

Question 5 -

The reference date is May 12, 2017. A T-bill maturing on August 17, 2017 is quoted with a bid discount rate of 0.880 and an asked discount of 0.870. Both discount rates are expressed in percentage form.

1. Determine the bid price, assuming a face value of $100.

2. Determine the ask price, assuming a face value of $100.

3. The market also quotes an asked yield. This is a simple interest rate, using actual days over 365 in the calculation. Determine the asked yield.

Reference no: EM131532929

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len1532929

6/16/2017 3:22:54 AM

All assignment answers must be submitted to the Blackboard course site in a Word format. Excel can used to do the calculations, but you must explain what you have done in Word. Simply stating that you used a particular Excel function is not acceptable. This may require you using the equation editor in Word. Please remember that clarity of exposition is important. Communication to senior management requires clarity. There must be sufficient explanation in English explaining how you derived your answer.

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