Bond Math Question

Hi, Does anyone know how to solve this one? An Investor has a 1-year 10% semiannual coupon bond with a price of $975. If the 6-month Treasury Bill (T-bill) has a holding period yield of 6%, what is the 1-year theoretical spot rate on a bond- equivalent basis? A. 6.4% B. 8.7% C. 9.9% D. 12.8% Thanks, Ajay Thawani

D 975=50/1.03 +1050/x^2 solve for x^2=13.3 x=6.4 6 months rate- 1y=12.8

Ans : D

I have a question for this. I understand the steps to solve this. However dont we need to add a zero volatility spread to get the spot rate for the coupon bond ( whch does not necessarily have to be a Govt issued security)

florinpop Wrote: ------------------------------------------------------- > D 975=50/1.03 +1050/x^2 > solve for x^2=13.3 x=6.4 6 months rate- 1y=12.8 Hi Florinpop, totally stupid question here. Why do you discount the first 6 months by 3% rate, but the next 6 months by the rate (1+x)? Ie, why is the discounted factor of the bond changing from the first semiannual period to the next? Thanks.

Hi Florinpop, I have the same question too. If they have give HPY, isnt if 6% for 6 months and not for the yr?

Yes. In my opinon, the first term should be 50/1.06. Since it is HPY given rather than BEY.

I think he meant it to be 6% the BEY for the 6 month spot rate would be 12%, and for 1 year as calculated would be 12.8%, so for a 10% coupon bond, it sells at a discount, everything makes sense

I think the effective yield per yr on this is 13.14% and bcoz the bond pays 10% it is at a discount.

yes guys sorry discount the first cupon by 1.06