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A. $98.16
B. $49,078.15
C. $50,000.00
D. $4,907,812.50
1
Answer to Example 1-1
B
If the quoted price is 98 5/32 this means that the dollar
amount is 0.981563 * $50,000 = $49,078.15
2
Example 1-2 Floating-Rate Coupon
The coupon of a floating-rate bond will be reset every six
months and be calculated with reference to the 6-month
LIBOR and a quoted margin of 150 basis points. (A basis
point is 1/100 of 1%, or 0.01%).
3
Example 1-3
Features of an Inverse Floater
Which of the following statements does NOT describe a
characteristic of an inverse floater? A floating-rate issue:
A. Whose coupon is determined by subtracting a reference rate
from some stated maximum rate.
B. Whose coupon rate will increase as market rates decrease
and decrease as market rates increase.
C. That may, under certain circumstances, require the
bondholder to make payments to the issuer.
D. That has an implicit cap on the maximum coupon rate and
typically includes a floor on the minimum coupon rate.
4
Answer to Example 1-3
C
The bondholder always receives coupon payments made by
the issuer and not the opposite since that would imply a
negative interest rate.
5
Example 1-4
Are caps & floors beneficial to investors?
Which of the following statements is TRUE regarding a
floating-rate issues that have caps and floors?
A. A cap is an advantage to the bondholder while a floor is an
advantage to the issuer.
B. A cap is an disadvantage to the bondholder while a floor is
an disadvantage to the issuer.
C. A floor is an disadvantage to both the issuer and the
bondholder while a cap is an advantage to both the issuer
and the bondholder.
D. A floor is an advantage to both the issuer and the
bondholder while a cap is an disadvantage to the issuer
and the bondholder.
6
Answer to Example 1-4
B
A cap limits the upside potential of the coupon rate paid on
the floating-rate bond and is therefore a disadvantage to the
bondholder.
A floor limits the downside potential of the coupon rate and is
therefore a disadvantage to the bond issuer.
7
Example 1-5
What is a Call Provision?
Which of the following statements is TRUE with regard to a
call provision?
A. A call provision is an advantage to the bondholder.
B. A call provision will benefit the issuer in times of declining
interest rates.
C. A callable bond will trade at a higher price than an identical
noncallable bond.
D. A nonrefundable bond provides more protection to the
bondholder than a noncallable bond.
8
Answer to Example 1-5
B
A call provision gives the bond issuer the right to call the
bond at a pre-specified price. A bond issuer may want to call a
bond if he is paying a high coupon and interest rates have
decreased so that he would be able to get cheaper financing.
9
Example 2-1 FV of Annuity
You plan to buy a property and are saving $100,000 at the end
of each year. Your savings can earn an interest rate of 6%.
How much down payment will you be able to make 5 years
from now?
10
Answer to Example 2-1
The amount you can save in 5 years:
= $100,000 * [(1+6%)5- 1] / 6%
= $563,709.30
11
Example 2-2
12
Answer to Example 2-2
Calculate the PV of the cash inflows:
= $1,200 * [1 – 1/(1+0.1)8] / 0.1
= $6,401.91
PV(Cash Inflows) > Cost of Asset You should buy it
13
Example 2-3 How to Calculate the Price of a Bond?
Consider a 2-year annual-coupon bond with 6% coupon
and the required yield is 7%.
What is the price of the bond?
14
Answer to Example 2-3
Principal = 100
Coupon = 6 Coupon = 6
time = 1 time = 2
P=?
6 6 100
P
7 1 7 2 7 2
(1 ) (1 ) (1 )
100 100 100
5.607 5.241 87.344
98.192
15
Example 2-4
What is the price of a zero-coupon bond that matures 15
years from now, if the maturity value is $1,000 and the
required yield is 9.4%?
16
Answers to Example 2-4
M = $1,000
r = 0.094 / 2 = 0.047
N = 2 * 15 = 30
$1,000 $1,000
P 30
(1.047) 3.96644
$252.12
17
Example 2-5 How to construct a market bid-ask spread?
18
Answer to Example 2-5
Answer: A
The lowest quoted ask price is Dealer B’s ask price (97 5/32),
and the highest quoted bid price is Dealer C’s bid price
(97 4/32). Thus, the bid-ask spread is 1/32.
19
Example 2-6 What is a fractional coupon period?
20
Answer to Example 2-6
Answer: B
C (May 15, 2002) M+C (May 15, 2004)
C (May 15, 2001) C (May 15, 2003)
v
22
Answer to Example 2-7
A
v = 36/360 = 0.1 (there are 22 days in April and 14 in May)
3
7.5 100
Bond Value 0.1 t -1
0.1 3-1
108.6344
t 1 (1 0.065) (1 0.065)
23
Answer to Example 2-7 (cont’d)
n = 0.1, i = 6.5, FV = 7.5, PMT = 0, PV = ? = -7.453
n = 1.1, i = 6.5, FV = 7.5, PMT = 0, PV = ? = -6.998
n = 2.1, i = 6.5, FV = 107.5, PMT = 0, PV = ? = -94.183
Add each cash flow for a dirty price of 108.634
24
Example 2-8 How to calculate accrued interest (AI)?
25
Answer to Example 2-8
B
Accrual Interest = (1 – v) * coupon payment
= (1.0 – 0.1) * 7.5 = 6.75
26
Example 2-9 How to calculate clean price?
Using the data in example 2-7, what is the clean price of
the bond?
A. 95.156
B. 95.491
C. 101.884
D. 100.000
27
Answer to Example 2-9
C
Clean Price = Dirty Price – Accrued Interest
= 108.634 – 6.75 = 101.884
28
Exercise 2-1
How to use a financial calculator to compute the bond price?
A. -$1.859
B. -$1.00
C. $0.00
D. $5.446
29
Answer to Exercise 2-1
A
By using a financial calculator, the current price of the bond
(i.e., where a 6% bond is being priced to yield 5%) can be
found as follows:
n = 2; FV = 100; PMT = 6, i = 5;
PV = ? = -101.859
Now, since the new interest rate equals the coupon rate of the
bond, the new price on the bond (i.e. a 6% bond being priced
to yield 6%) will be its par value. Thus,
Bond price change = 100 – 101.859 = -1.859
30
Exercise 2-2 Discount, Par & Premium
Bond A Bond B
A. $74.061 $84.708
B. $74.061 $117.204
C. $74.322 $117.204
D. $131.139 $131.139
31
Answer to Exercise 2-2
C
For Bond A, using a financial calculator;
n = 15, i = 8, FV = 100, PMT = 5, PV = ? = - 74.322
For Bond B, using a financial calculator;
n = 20, i = 6, FV = 100, PMT = 7.5, PV = ? = - 117.204
Because the coupon on Bond A is less than its required yield,
the bond will sell at a discount; conversely, because the
coupon on Bond B is greater than its required yield, the bond
will sell at a premium.
32
Exercise 2-3 Repeat for semiannual-pay bond
Bond A Bond B
A. $121.615 $91.354
B. $113.898 $94.441
C. $74.661 $94.441
D. $74.661 $117.559
33
Answer to Exercise 2-3
A
For Bond A, using a financial calculator;
n = 15 * 2 = 30, i = 8 / 2 = 4, FV = 100, PMT = 10.5 / 2 =
5.25;
PV = ? = - 121.615
For Bond B, using a financial calculator;
n = 30, i = 4, FV = 100, PMT = 7 / 2 = 3.5;
PV = ? = - 91.354
34
Exercise 2-4
Testing your concept of Discount, Par & Premium
Given the following bonds, which is not priced correctly?
Bond Coupon Rate Yield to Maturity Price
A 6% 6% $100.0
B 8% 6% $105.0
C 6% 8% $102.5
D 8% 9% $97.5
A. A
B. B
C. C
D. D
35
Answer to Exercise 2-4
C
If the coupon rate of the bond is less than the yield to
maturity, the bond must sell at a discount to par. Bond C sells
for $102.5, which is premium to par.
36
Review Question 1 – Return/Yield
37
Review Q.1 – Answer
38
Review Question 2 – Yield/IRR
A financial instrument selling for $850 promises to make the
following annual payments:
1 100
2 1000
39
Review Q.2 – Answer
40
Review Question 3 – Annualizing Yield
41
Review Q.3 – Answer
42
Example 3-1 How to calculate Current Yield?
43
Answer to Example 3-1
A
Current yield = 7.125/102.347 = 0.06962 or 6.962%
44
Example 3-2 How to calculate Yield to Maturity?
ABC Co. 7 1/8 percent, 4-year, semiannual-pay bond trading
at 102.347 percent of par (where par = $100). Assume that
the bond is callable at 101 in two years, and putable at 100 in
two years. What is the bond’s yield to maturity?
A. 3.225%
B. 6.450%
C. 6.334%
D. 5.864%
45
Answer to Example 3-2
B
8
3.5625 100
102.347
t 1 (1 YTM / 2) (1 YTM / 2)8
t
YTM 6.45%
46
Example 3-3 Characteristics of Yield to Maturity
(YTM)
Which of these statements is NOT true about a bond’s yield
to maturity (YTM):
A. It is the internal rate of return of a bond
B. It is the discount rate that equates a bond’s cash flows to a
bond’s price
C. It expresses yield as a percentage of par value and not the
price of the bond
D. It assumes that all cash flows are reinvested at the yield to
maturity
47
Answer to Example 3-3
C
A, B & D are all characteristics of a bond’s yield to maturity.
Internal rate of return and yield to maturity for a bond are the
same.
48
Example 3-4 How to calculate Yield to Call (YTC)?
49
Answer to Example 3-4
C
4
3.5625 101
102.347
t 1 (1 YTC / 2) t
(1 YTM / 2) 4
YTC 6.334%
50
Example 3-5 How to calculate Yield to Put (YTP)?
51
Answer to Example 3-5
D
4
3.5625 100
102.347
t 1 (1 YTP / 2) t
(1 YTP / 2) 4
YTP 5.864%
52
Example 3-6 What is a Bond Equivalent Yield?
53
Answer to Example 3-6
C
Bond Equivalent Yield
= ([1+EAY]0.5 -1) * 2 = ([1.0635]0.5 -1) * 2 = 6.252%
54
Example 3-7 A Compounding and Decompounding
Exercise
You determine that the cash flow yield of GNMA Pool
3856 is 0.382 percent per month. What is the bond
equivalent yield?
A. 9.582%
B. 9.363%
C. 4.682%
D. 4.628%
55
Answer to Example 3-7
D
Bond Equivalent Yield
= [(1+ Monthly CFY)6 -1] * 2
= [(1.00382)6 -1] * 2 = 4.628%
Or:
Equivalent Annual Yield
= (1+ Monthly CFY)12 -1
= (1.00382)12 -1 = 4.682%
Bond Equivalent Yield
= ([1+EAY]0.5 -1) * 2
= ([1.04682]0.5 -1) * 2 = 4.628%
56
Example 3-8 How to calculate Discount Margin?
57
Answer to Example 3-8
B
Expected coupon = (100 * (0.06375 + 0.0125)) = 7.625
4
7.625 100
97.65
t 1 (1 YTM ) (1 YTM ) 4
t
YTM 8.34%
58
Example 3-9 Concept of Interest on Interest
(Reinvestment Income)
You observe an 8.5 percent semiannual bond with 5 years to
maturity trading 97.051. The yield to maturity of the bond is
9.25 percent. How much is the interest-on-interest income
(in dollars) if the reinvestment rate of all the coupon interests
is 9.25 percent over the 5 years?
A. $88.24
B. $511.24
C. $100.30
D. $525.30
59
Answer to Example 3-9
C
N = 10, PMT = 4.25, PV = 0, I = 4.625
=> FV = ? = 52.53
However, the 52.53 include 42.5 in coupon payments.
Therefore, you need to earn:
52.53 – 42.5 = 10.03 in interest on interest income
60
Example 3-10 Concept of Interest on Interest
(Reinvestment Income)
You observe an 8.5 percent semiannual bond with 5 years to
maturity trading 97.051. The yield to maturity of the bond is
9.25 percent. How much interest-on-interest income (in
dollars) will you need to earn in order to have a realized
return of 9.25 percent on your investment over 5 years?
A. $88.24
B. $511.24
C. $100.30
D. $525.30
61
Answer to Example 3-10
C
Realizing YTM implies that the reinvestment rate for all the
coupons is equal to YTM, that is, 9.25%.
N = 10, PMT = 4.25, PV = 0, I = 4.625
=> FV = ? = 52.53
However, the 52.53 include 42.5 in coupon payments.
Therefore, you need to earn:
52.53 – 42.5 = 10.03 in interest on interest income
62
Question 3-11 Total Return
Suppose that an investor with a five-year investment horizon
is considering purchasing a seven-year 9% coupon bond
selling at par. The investor expects that he can reinvest the
coupon payments at an annual interest rate of 9.4% and that
at the end of the investment horizon two-year bonds will be
selling to offer a yield to maturity of 11.2%. What is the total
return for this bond?
63
Solution to Question 3-11
Step 2: The projected sale price = the present value of the coupon
payments + present value of maturity value
PMT = 45, i = 5.6, n = 4, FV = 1,000, PV = ?; PV = -961.53
A. 3.76
B. 4.35
C. 5.00
D. 6.34
65
Answer to Example 4-1
C
The duration of a zero coupon bond is always equal to its term
to maturity.
66
Example 4-2 What is the duration of a floating rate debt?
What is the duration of a floating rate bond that has six
years remaining to maturity and has semi-annual coupon
payments? Assume a flat term structure of 6 percent.
Which of the following is closest to the correct duration?
A. 0.285
B. 0.500
C. 4.800
D. 12.000
67
Answer to Example 4-2
B
The duration of a floating rate bond is equal to the time until
the next coupon payment takes place.
As the coupon rate changes semi-annually, the duration on
this bond will be half a year, or 0.5.
In effect, a floating rate bond has the same duration as a pure
discount (zero coupon) bond with time to maturity equal to
the time to the next coupon payment of the floating rate bond.
68
Example 4-3 How to apply the concept of duration?
69
Answer to Example 4-3
B
The zero-coupon bond will have the longest duration of any
of the 4 bonds and will be subject to the greatest amount of
price risk/interest rate risk.
70
Example 4-4 How to apply modified duration to estimate
percentage change in bond price?
A. -8.657%
B. -7.155%
C. +7.155%
D. +8.657%
71
Answer to Example 4-4
D
Estimated percentage change in price = -7.87 * (-1.10%) =
8.657%
72
Example 4-5 How to calculate the convexity of a bond?
73
Answer to Example 4-5
D
Since the bond is trading at Par, the yield to maturity now is
14.00%
To calculate the convexity, we can shift the interest rate down
by 25 basis points, i.e. at 13.75% to calculate P- and shift the
interest rate up by 25 basis points, i.e. at 14.25% to calculate
P+.
To calculate P-: PMT=14/2=7, n =6*2=12, i = 13.75/2=6.875,
FV=100, PV=?=100.999
To calculate P+: PMT=14/2=7, n =6*2=12, i = 14.25/2
=7.125, FV=100, PV=?=99.014
74
Answer to Example 4-5 (cont’d)
P P 2P0
Convexity
P0 (y) 2
100.999 99.014 - 200
2
20.8
(100)(0.0025)
75
Example 4-6 How to apply convexity to estimate percentage
change in bond price?
76
Answer to Example 4-6
C
Convexity Effect = ½ * Convexity * (y)2
= ½ * 57.3 * (0.011)2
= 0.00347 or 0.347%
77
Example 4-7 How to estimate percentage change in bond
price?
Assume you are looking at a bond that has a modified
duration of 10.5 and a convexity of 97.3. Using both of these
measures, find the estimated percentage change in price for
this bond, if the yield increases by 200 basis points.
A. -22.95%
B. -19.05%
C. -17.11%
D. -24.89%
78
Answer to Example 4-7
B
Total estimated price change
= (duration effect + convexity effect)
= [-duration * (y)] + [½ * convexity * (y)2]
= [-10.5 * ] + [½ * 97.3 * ()2]
= -21.0% + 1.946% = -19.05%
79
Example 4-8
Why convexity is good for bond investors?
80
Answer to Example 4-8
A
Total percentage change in price = Duration effect +
Convexity effect.
Thus
-13.35% = Duration effect + 1.75%
=> Duration effect = -13.35% - 1.75% = -15.10%
(Note the duration effect must be negative because yields are
rising)
81
Example 4-9 What drives bond price changes?
The total price volatility of a typical option-free bond can be
found as follows:
A. Add the bond’s convexity effect to its duration effect.
B. Add the bond’s negative convexity effects to its modified
duration.
C. Subtract the bond’s negative convexity from its positive
convexity.
D. Subtract the bond’s modified duration from its effective
duration, then add any positive convexity.
82
Answer to Example 4-9
A
Total percentage change in price = Duration effect +
Convexity effect.
83
Example 5-1 Bond Terminology
84
Answer to Example 5-1
A
The on-the-run Treasury issue is the most recently issued
Treasury security of a certain type as opposed to an off-the
run issue that has been issued earlier.
85
Example 5-2 Concept of Absolute Yield Spread
Assume the following yields for different bonds issued by
a corporation.
- One-year rate: 5.50%
- Two-year rate: 6.00%
- Three-year rate: 7.00%
If the on-the-run three-year U.S. Treasury is yielding 5
percent, then what is the absolute yield spread on the three-
year corporate issue?
A. 0.40
B. 1.40
C. 100bps
D. 200bps
86
Answer to Example 5-2
D
Absolute yield spread = yield on the 3-year corporate issue –
yield on the on-the-run 3-year Treasury issue
= 7.00% - 5.00% = 2.00% or 200 bps.
87
Example 5-3 Concept of Relative Spread
88
Answer to Example 5-3
A
The yield on the corporate is 7% so the relative yield is
(7% - 6%)/6% which is 1/6 or 16.67% of the 3-year
Treasury-yield.
89
Example 5-4 Flight to Quality
90
Answer to Example 5-4
B
Flight to quality
91
Example 5-5 Yield curve trading strategy
Assume that the following hypothetical Treasury securities
(settlement date: 30-Oct-02) are trading actively.
Coupon Maturity Price
Bond A 8% 15-Sep-03 100.35
Bond B 9.75% 15-Aug-20 100
Assume that an investor believes that all yield curves are
going to flatten. Under this scenario and using these bonds,
which of the following trades is correct?
A. Intramarket trade that buys bond A and short sells bond B.
B. Intermarket trade that short sells bond A and buys bond B.
C. Intramarket trade that short sells bond A and buys bond B.
D. Intermarket trade that buys bond A and short sells bond B.
92
Answer to Example 5-5
C
If you expect the yield curve to flatten then short term interest
rates have to increase relative to long term interest rates (but
not necessarily in absolute terms). Therefore, short-term
bonds will underperform and long-term bonds will outperform
– this strategy is consistent with your beliefs.
This is an intramarket trade.
93
Example 5-6 Yield curve trading strategy
Assume that the following hypothetical Treasury securities
(settlement date: 30-Oct-02) are trading actively.
C
If you expect the yield curve to steepen then short term
interest rates have to decrease relative to long term interest
rates (but not necessarily in absolute terms). Therefore, this
strategy is consistent with your beliefs.
95
Example 5-7 – Concept of Equivalent Taxable Yield
Assume an investor is in the 31% marginal tax bracket. She
is considering the purchase of either a 7½ percent corporate
bond that is selling at par, or a 5¼ percent municipal bond
that is also selling at par. Given the two bonds are
comparable in all respects but tax features, and based on the
equivalent taxable yields, the investor should buy the:
A. Corporate bond, as it has the higher yield (7.50%)
B. Municipal bond, since the equivalent taxable yield on it is
10.87%
C. Municipal bond, as it has a higher equivalent taxable yield
(7.61%)
D. Corporate bond, since the equivalent taxable yield on the
muni is 5.17%
96
Answers to Example 5-7
C
Tax - exempt yield
Equivalent taxable yield
1 - Marginal tax rate
5.25%
Equivalent taxable yield 7.61%
1 - 0.31
97
Example 5-8 Taxability of Interest
Assume that the following hypothetical Treasury securities
are trading actively.
98
Answer to Example 5-8
A
The reduction in coupon is mostly likely a reflection of the
fact that the coupon income is not taxable.
99
Example 5-9 – Concept of Liquidity Premium
100
Answer to Example 5-9
A
Since more liquid bonds have lower transaction costs
associated with them and tend to trade more frequently,
investors prefer liquidity and are therefore willing to pay
premium prices for more liquid bonds.
101
Example 5-10 Concept of Implied Forward Rate
The 4-year spot rate is 9.45 percent, and the 3-year spot rate
is 9.85 percent. What is the 1-year forward rate 3 years from
today?
A. 0.400%
B. 9.850%
C. 8.256%
D. 11.059%
102
Answer to Example 5-10
C
(1.0945)4 = (1.0985)3 * (1+1f3)
(1.0945) 4
3
1 1 f 3 8.256%
(1.0985)
103
Example 5-11
A coupon bond is a combination of zero-coupon bonds
104
Answer to Example 5-11
C
The YTM on the 2-year zero is too high => its price too low.
You want to buy some arbitrary quantity of 2-year zeros.
He completes the arbitrage by buying enough of the 1-year
zeros so that he can aggregate these into 2-year coupon bonds
and sell the coupon bonds
105
Example 5-12 Simple Bootstrapping
106
Answer to Example 5-12
B
6.75 106.75
100
(1.055) (1 Z 2 ) 2
t
1
106.75
2
Z 2 1 6.793%
93.602
107
Example 5-13 Arbitrage-Free Valuation
108
Answer to Example 5-13
C
Using the arbitrage free method, the fair value of the bond can
be computed by:
10/(1.04) + 10/(1.06)2 + 110/(1.07)3 = $108.308
Or, add the following financial calculator computations:
n =1, PMT = 0, FV=10, I = 4, PV=?= 9.616
n =2, PMT = 0, FV=10, I = 6, PV=?= 8.900
n =3, PMT = 0, FV=110, I = 7, PV=?= 89.793
Based on the current selling price of $105, the bond is
undervalued by (108.308 – 105) = 3.308
109
Example 5-14 – Another tool to perform treasure
hunting
A 3-year U.S. corporate bond with a par value of $100 is
priced at $107.5. The bond has an interest rate of 8% and
makes payments semiannually. 3-year bonds with
comparable credit quality have a yield to maturity of 6%.
Using the required yield to maturity approach to finding the
bond’s fair value, would you purchase this bond?
A. No, the bond is overvalued by $2.1
B. No, the bond is overvalued by $4.3
C. Yes, the bond is undervalued by $2.1
D. Yes, the bond is undervalued by $4.3
110
Answer to Example 5-14
A
The required yield to maturity approach discount all cash
flows at the yield to maturity. In this case, the required yield
to maturity is 6%. The bond’s fair value can be computed as:
PMT = 4, I = 3, FV = 100, n = 6, PV=?= 105.417
Based on the current selling price of 107.5, the bond is
overvalued by (107.5 – 105.4) = 2.1
111
Example 5-15 How to estimate the price of a
corporate bond?
A corporate bond and a government bond have equivalent
characteristics. They both have a coupon rate of 6 percent,
pay coupon annually, and have two years remaining to
maturity. Assuming a flat government term structure of 7
percent, which of the following is a possible price (as a
percentage of par) of the corporate bond?
A. 97.76
B. 98.19
C. 98.78
D. 101.35
112
Answer to Example 5-15
A
Since the corporate bond involves credit risk and the
government bond doesn’t, the corporate bond must have a
higher yield and, therefore, carry a lower price than the
government bond, whose price can be computed as follows:
n = 2, FV = 100, PMT = 6, i = 7; PV = ? = 98.19.
Thus, since the corporate bond price has to be less than the
government, there can only be one possible answer: a quote of
97.76.
113
Example 6-1
Assume that $14.5 billion of five-year T-notes are
auctioned off. The amount of non-competitive bids is
$2.5 billion, and the amount of competitive bids is $31.5
billion. Suppose that of the competitive bids, $11.5
billion are higher than the high yield and the rest are at
the high yield. For the competitive bidders at the stop
yield, what proportion of their bids will they receive?
A. 38.10%
B. 46.03%
C. 60.00%
D. 72.50%
114
Answer to Example 6-1
C
This value is computed as follows:
Non-competitive bids are first subtracted from the total auction
value. Therefore, amount available for competitive bids = $14.5b -
$2.5b = $12 billion.
Amount of total competitive bids at high yield or lower = 31.5b -
$11.5b = $20 billion.
Proportion of competitive bids at stop yield filled = $12b/$20b =
60%.
115
Example 6-2
Which of the following is a difference between an on-
the-run issue and an off-the-run issue? An on-the-run
issue:
A. Will always carry a higher coupon
B. Is the most recently issued security of that type
C. Has a shorter maturity than an off-the-run issue
D. Is publicly traded whereas an off-the-run issue is not
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Answer to Example 6-2
B
On-the-run issues are the most recently issued securities.
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Example 6-3
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Answer to Example 6-3
B
This value is computed as follows: dollar price = 97 17/32 x
$100,000 = $97,531.25
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Example 6-4
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Answer to Example 6-4
A
The T-note principal strip has exactly the same cash flow as
the T-bill.
Therefore, the prices of the two securities should be (about)
equal.
However, market imperfections, such as illiquidity, may lead
to differences.
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