The Us Treasury Yield Curve

We take Yields to Maturity of U.S.10 Year Treasury Note as the risk-free rate (rf). Long-term government bonds are the least risky among all financial assets. They are issued by the government so they have no default risk. Also, long-term bonds match the duration of Boston Beer’s cash flow better than short-term or medium-term bonds do. Therefore, we use the rate as our risk-free rate, which is 2.17% as of

3. Which of the following statements about the yield-to-maturity is true? a) Discounting all cash flows of a bond with the bond’s yield-to-maturity only gives us the correct price if we have a flat term structure of interest rates. b) The yield-to-maturity is upwards sloping. c) The yield-to-maturity is always a spot rate. d) Several of the above statements are true. e) None of the above statements are true. E is correct. The yield-to-maturity, y is the constant hypothetical interest rate that solves P = 1 FV c 1− + T y (1 + y) (1 + y)T

Analysis Questions- Please answer each of the following in at least a paragraph, using specific evidence as support.

Premium or discount occurs when nominal interest rate(or coupon rate) of the bond differs from the current market rate of interest demanded by lenders.Regardless of the required yield, the bond price will reach face value as its approaches the maturity date.

Bonds are a debt investment, meaning the purchaser of the bond is loaning money to the company or government for a set period. They have a fixed interest rate, meaning the investor knows how much interest will be earned on the loan since the rate will not change.

The nominal risk-free rate, which includes an inflation premium equal to the average expected inflation rate over the life of the security. The T-bill rate to measure the short-term risk-free rate The T-bonds rate to measure the long-term risk-free rate. In this case,we should choose T-bonds rate. Because the T-bill is safe because it is issued by the governments, and it has a short period to maturity. That is good investment returns are usually stated as annual returns, and the T-bill rate is a one-year risk free rate.

35) The correlation between an interest rate on a debt instrument and the level of security is: C

Money market securities are short term instruments created by governments and corporations to obtain short term funding. Treasury bills (T-bills) are common instruments used in the money market and are issued by the U.S. government. Moreover, T-bills are used by the government to refinance maturing debt and to cover budget deficits. The Federal Reserve also uses T-bills as a fundamental technique to implement monetary policy (Saunders & Cornett, 2015). If a one purchases a T-bill that is 90 days from maturity, for $9,970 and with a face value of $10,000, the quoted yield is 1.200%, the bond equivalent yield is 1.2201% and the EAR is 1.222% (see Table 1).

3. Bliss, Robert R., and Ehud I. Ronn. "Callable U.S. Treasury Bonds: Optimal Calls,        Anomalies, and Implied Volatilities." The Journal of Business 71.2 (1998): 211-52. Web.

As a result, bond rates tend to rise in order to create demand for them. Conversely, when investors are afraid of indicators in the financial sector, they turn to safer investments like bonds. The rate of return on these bonds drops in parallel with the increased demand for them.

a. The Yield to Maturity (YTM) is the nominal rate of return which investors would realize if they held the bond to maturity and the bond did not default.

(b) Coupon and principal of the Regular Treasury bonds are fixed, therefore if the inflation rate increases in the forecasting future, investor will receive the same amount of coupon and principal with less real value and purchasing power.

Through this method, we obtained theoretical yields of the 4.25% coupon bond and 10.625% coupon bond to be 2.899% and 2.639% respectively. The corresponding theoretical prices of the bonds are $108.27 for the 4.25% coupon bond and $149.31 for the 10.625% coupon bond (see Table 1 above).

Interest rates have a major economic impact on the real estate market. Interest rates directly affect property sales. Residential property realizes the greatest affect as interest rates have a considerable influence on a homebuyer’s capability to purchase a new property. The customer is affected when there are significant increases or decreases in interest rates. Declining interest rates lower the costs of obtaining a mortgage; this in turn creates higher demand for homes, and pushes home prices up. Conversely, high interest rates increase the costs to obtain a mortgage; these increases lower the demand for homes, which creates a decline in home prices. (Stammers, 2016)

Describe the differences in interest payments and bond price between a 5 percent coupon bond and a zero coupon bond.