A treasury note has an original maturity of 2-10 years.
A treasury bill trades in the money market & is a pure discount instrument.
Short-term unsecured obligations issued by corporations are commercial papers.
Eurodollar CD’s generally carry higher interest rates than domestic CD’s. Some of the contributing factors are ED CD issuers avoid U.S. reserve requirements, and ED CD issuers avoid paying FDIC deposit insurance premiums.
Commercial paper carries higher quoted yields than Treasury bills even though both securities trade in the money market. A contributing factor is that the commercial paper suffers from credit risk.
A U.S. Treasury bill is trading an ask price of 98.235. The bill has 135 days remaining until maturity. Compute the quoted yield. (100-98.235)/100 * (360/135) = 4.71%
Compute the BEY on the above referenced T-bill. (100 – 98.235)/98.235 * (365/135) = 4.86%
A negotiable CD has a quoted interest rate equal to 2.35%. Compute the yield on bond equivalent basis. – 2.35 * (365/360) = 2.38
A “bond equivalent yield” as presented in class is an “annual percentage rate” or APR.
Consider the two bonds with 10 years to maturity & identical risk characteristics. A B Coupon 5% 6% Price $1,000 $1,200 YTM 5% ? Compute the quoted yield to maturity for bond B assuming it pays semi-annual coupons. PV = -1200 , PMT = 30 , FV = 1000 , n = 20 … I = 1.8003 * 2 = 3.6% Consider a 10% coupon bond with 20 years to mat. The bond pays annual coupons. If equivalent semi-annual coupon bonds are trading at a quoted yield of 10%, what price should an investor be willing to pay for this annual coupon bond? N = 40, PMT = 50, FV = 1000, (1+ .1/2)^2 – 1 = 10.25, I = 10.25, PV = 979 Firms that specialize in facilitating the issuance of new securities in the financial markets are known as investment banks. When a “financial