Question: It's 1 January 2001 and you're considering buying a $1,000 face-value U.S. Treasury bill which matures in 1 year. The interest rate is 7% annually.
A. If you buy the T-Bill now, how much will you pay?
B. If the interest rate remains 7% annually, how much will the bill be worth on 1 February 2001? 1 March? 1 April? ... 1 December?
On March 15, 2002, you purchased a 2-year Treasury bond with face value $10,000 and a 4% coupon (payable semi-annually). The price of the bond was $9,750; it promises a coupon of $200 on 15 September 2002, 15 March 2003, 15 September 2003, and 15 March 2004 (on this last date the bond will repay its face value).
a. Based on the following, compute the annualized IRR of the bond purchase:
b. On 16 September 2002 you sold the bond for $10,000. What was the ex-post annualized yield that you got? What was the ex-ante annualized yield of the buyer of the bond?