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