Q1. What are your cash flows on 6/15/2010 and 12/15/2010? Are there any other cash flows? (Remember to indicate the direction of each cash flow.)
Q2. What is the yield to maturity? Express the yield to maturity using the same quoting convention as LIBOR.
Q3. What is the expected rate of return on your investment? Express the rate of return using the same quoting convention as LIBOR.
On 9/15/2010, 3M LIBOR was 0.29203% and 6M LIBOR was 0.47453%.
Q4. What is the present value, as of 9/15/2010, of your Eurodollar deposit cash flow on 12/15/2010?
Treasury Bills
The following table shows the price quotes for Treasury instruments on 12/2/2010.
|
Treasury Instrument
|
Coupon
|
Maturity Date
|
Price
|
Yield
|
|
3-Month T-Bill
|
N.A.
|
3/3/2011
|
0.15
|
0.15
|
|
6-Month T-Bill
|
N.A.
|
6/2/2011
|
0.19
|
0.19
|
|
12-Month T-Bill
|
N.A.
|
11/17/2011
|
0.26
|
0.26
|
|
2-Year T-Note
|
0.500
|
11/30/2012
|
99-29
|
0.54
|
|
3-Year T-Note
|
0.500
|
11/15/2013
|
99-00+
|
0.84
|
|
5-Year T-Note
|
1.375
|
11/30/2015
|
98-19
|
1.67
|
|
7-Year T-Note
|
2.250
|
11/30/2017
|
99-07+
|
2.37
|
|
10-Year T-Note
|
2.625
|
11/15/2020
|
96-25+
|
3.00
|
|
30-Year T-Bond
|
4.250
|
11/15/2040
|
99-242
|
4.26
|
The "prices" are exact, but the yields are only approximate because of rounding.
You invested $100,000,000 face amount in six-month Treasury bills at the quoted discount rate of 0.19%. Assume same-day settlement.
Q5. What are your cash flows on 12/2/2010 and 6/2/2011? Are there any other cash flows?
Q6. What is the yield to maturity? Express the yield to maturity using the ACT/ACT convention.
Q7. What is the expected rate of return on your investment? Express the rate of return using ACT/ACT convention.
Suppose that, right after you purchased the T-bills, the three-month T-bill yield goes up by 5 bp (0.05%) and the six-month T-bill yield goes up by 10 bp (0.10%). (Incidentally, that is unlikely but not impossible.)
Q8. What would your T-bills be worth?
Q9. Express your gain or loss as a percentage of your original investment. This number is not annualized. I want you to calculate it so that you can see the magnitude and direction of the gain or loss.
Suppose that, 90 days after you purchased the T-bills, the three-month T-bill yield goes up by 5 bp and the six-month T-bill yield goes up by 10 bp.
Q10. What would your T-bills be worth?
Q11. Express your gain or loss as a percentage of your original investment.
Q12. If you were to sell your T-bills then, what would be your rate or return? Express your rate of return using the same convention as a T-bill yield. Remember that you should annualize your rate of return. The gain or loss you calculated in Q11 is over a period of 90 days.
Treasury Notes and Bonds
You invested $100,000,000 face amount in each of the 2-year, 3-year, 5-year, 7-year, and 10-year notes and 30-year bond (total of 6 investments).
Q13. Calculate the amount paid for each note and bond.
Q14. Calculate the yield to maturity for each note and bond.
Suppose that, right after you purchased the T-notes and bonds, all yields go up by 10 bp from your calculated numbers in Q14.
Q15. Calculate the gain or loss as a percentage of your original investment for each note and bond.
Suppose that, right after you purchased the T-notes and bonds, all yields go down by 10 bp from your calculated numbers in Q14.
Q16. Calculate the gain or loss as a percentage of your original investment for each note and bond.
Q17. The results for Q15 and Q16 are very important. You should study the numbers carefully and think of their implications. What conclusions can you draw from them?