Spot rate

CFA Level I
#1

An investor has a 1 year 10% semi annual coupon bond with price of $975. If the 6-month T-bill has holding period yield of 6% what is the 1-year theoritical spot rate on a BEY basis? a. 6.4% b. 8.7% c. 9.9% d. 12.8% I’m a bit lost how to even approach this question. Any help?

#2

i was literally about to post that very question…

#3

50/(1.06)+1050/(1+X^2)=975…once you have soved for X, multiply by 2 to get the bond equivalent yield.

#4

I got D.

#5

50/(1.06) + 1050/(1+x)^2 = 975 x = 6.38% This is a 6 month rate, so the 1 year rate should be 12.8% So I say D

#6

Answer is A if you plug in A, you get 975. Basically A is the BEY and D is converted in annual yield.

#7

I also got D. I just used the TVM function to solve I/Y and multiplied it by 2 (totally ignoring that 6month T-bill though).

#8

answer definitely D

#9

Or calc. I/y for the bond and multiply x 2.

#10

So I was right the first time. At least it’s not the real thing lol

#11

A?? N=20 PV= -937 FV=1000 PMT= 30 ( .03*1000) CPT, I/Y=3.17 BEY= 3.17*2= 6.34

#12

Audrey- Is that a new question?

#13

D) !!!

#14
#15

This should be: $975 = $50/1.03 + $1050/(1+r/2)^2 Solve for r… $105/(1+r/2)^2 = $926.46 r=12.92%, close to D.

#16

Dreary Wrote: ------------------------------------------------------- > This should be: > $975 = $50/1.03 + $1050/(1+r/2)^2 > Solve for r… > > $105/(1+r/2)^2 = $926.46 > r=12.92%, close to D. dreary, 6% is the 6 month spot rate and 50 should be discounted by 1.06

#17

Dreary Wrote: ------------------------------------------------------- > This should be: > $975 = $50/1.03 + $1050/(1+r/2)^2 > Solve for r… > > $105/(1+r/2)^2 = $926.46 > r=12.92%, close to D. Dreary… the HPY for the 6mo treasury is 6% which means the spot rate is 6%, your first term needs to be $50/1.06 in this case you were ok, but if the yield curve was steeper and other answers closer you would have been in trouble.

#18

Why divide by 6%? This is the annual rate for the 6-month CD, not your holding period. You If you buy a 6-month CD at 6%, you don’t get 6%, you only get 1/2 of that.Ami I missing something here?

#19

oh I see, the problem says so!! Phew.

#20

This bond’s yield (YTM) is only slightly different from the spot rate (12.74% versus 12.76%), which is interesting. Bonus question, why do you suppose it is so?