You have purchased a $1,000 Face Value 20-year U

Finance Nov 24, 2020

You have purchased a $1,000 Face Value 20-year U.S. Treasury Note (T-Note). The T-Note purchased has a 2% coupon rate (compounded semi-annually) and the current market Yield to Maturity (YTM) is 0%. What is the market price of this 20-year T-note? Calculate the price without using a bond calculator and explain how you arrived at the price!

Expert Solution

ANSWER -

Solution

Current Price of note=Present value of coupon payments+ Present value of face value

Current Price of note=Coupon payment*((1-(1/(1+r)^n))/r)+Face value/(1+r)^n

Here

Face value =1000

n=number of periods to maturity=20*2=40

r- interest rate per period=YTM per period (semi annual)=0

Semi Annual Coupon payment=coupon rate *face value/2=2%*1000/2=10

Since the YTM=0%

Present value of coupon payments=Amount of coupon payments=10*40=400

Also

Present value of face value=Face value=1000

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