Treasury spot rates are as follows in today's market: Maturity (years) 1 2 3 Spot rate 2.1% 2.7% 3.3% One year ago, a 3-year Treasury note ($1,000 face value, 4% coupon rate and pays annual coupon) was issued and today it has two years left to maturity and two cashflows left to pay. Part 1 If this security is fairly priced in today's market, what must be true about the YTM? Check all that apply: 3.3% > YTM > 2.7% YTM > 3.3% Being the complex average of 1-yr and 2-yr Treasury spot rates, YTM is quite close to 2-yr spot rate but quite far from 1-yr spot rate YTM < 2.1% Being the complex average of 1-yr and 2-yr Treasury spot rates, YTM is quite close to 1-yr spot rate but quite far from 2-yr spot rate 2.7% > YTM > 2.1% Part 2 If this security is under-priced but greater than $1,000 in today's market, what can you conclude about the YTM? Check all that apply: YTM < 4% 3.3% > YTM > 2.7% YTM must be greater than that computed in Part 1 2.7% > YTM > 2.1%
Treasury spot rates are as follows in today's market: Maturity (years) 1 2 3 Spot rate 2.1% 2.7% 3.3% One year ago, a 3-year Treasury note ($1,000 face value, 4% coupon rate and pays annual coupon) was issued and today it has two years left to maturity and two cashflows left to pay. Part 1 If this security is fairly priced in today's market, what must be true about the YTM? Check all that apply: 3.3% > YTM > 2.7% YTM > 3.3% Being the complex average of 1-yr and 2-yr Treasury spot rates, YTM is quite close to 2-yr spot rate but quite far from 1-yr spot rate YTM < 2.1% Being the complex average of 1-yr and 2-yr Treasury spot rates, YTM is quite close to 1-yr spot rate but quite far from 2-yr spot rate 2.7% > YTM > 2.1% Part 2 If this security is under-priced but greater than $1,000 in today's market, what can you conclude about the YTM? Check all that apply: YTM < 4% 3.3% > YTM > 2.7% YTM must be greater than that computed in Part 1 2.7% > YTM > 2.1%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Treasury spot rates are as follows in today's market:
| Maturity (years) | 1 | 2 | 3 |
| Spot rate | 2.1% | 2.7% | 3.3% |
One year ago, a 3-year Treasury note ($1,000 face value, 4% coupon rate and pays annual coupon) was issued and today it has two years left to maturity and two cashflows left to pay.
Part 1
If this security is fairly priced in today's market, what must be true about the YTM?
Check all that apply:
3.3% > YTM > 2.7%
YTM > 3.3%
Being the complex average of 1-yr and 2-yr Treasury spot rates, YTM is quite close to 2-yr spot rate but quite far from 1-yr spot rate
YTM < 2.1%
Being the complex average of 1-yr and 2-yr Treasury spot rates, YTM is quite close to 1-yr spot rate but quite far from 2-yr spot rate
2.7% > YTM > 2.1%
Part 2
If this security is under-priced but greater than $1,000 in today's market, what can you conclude about the YTM?
Check all that apply:
YTM < 4%
3.3% > YTM > 2.7%
YTM must be greater than that computed in Part 1
2.7% > YTM > 2.1%
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