Assume that the following data on U.S. Treasury securities is current:
-Refer to the information above. You purchase a $1,000, zero-coupon, Treasury bond that matures in seven years. Assume the term structure remains constant and that your sell the
Bond after having held it only 5 years. At what price should you be able to sell it?
A)$1,237.86
B)$914.50
C)$807.85
D)$958.22

Question

Assume that the following data on U.S. Treasury securities is current: 
-Refer to the information above. You purchase a $1,000, zero-coupon, Treasury bond that matures in seven years. Assume the term structure remains constant and that your sell the
Bond after having held it only 5 years. At what price should you be able to sell it?
A)$1,237.86 
B)$914.50 
C)$807.85 
D)$958.22

Quizplus · Accepted Answer

To calculate the price at which you can sell the bond after 5 years, we need to calculate the yield to maturity (YTM) after 5 years. Using the provided data, we can assume that the yield curve is flat, so the YTM for a 5-year bond is 2.5% (the current yield for the 5-year Treasury bond).

Using the YTM, we can calculate the price of the 7-year bond after 5 years using the formula:
Price = Face Value / (1 + YTM)^Years
Price = 1,000 / (1 + 2.5%)^5
Price = $914.50

Therefore, the best choice is B. Using the provided Treasury bond data, we can use the formula for zero coupon bond price:

Bond price = FV / (1 + r)^n

where FV is the face value, r is the yield to maturity for the bond, and n is the number of years until maturity.

Plugging in the values from the provided data, we can solve for the yield to maturity:

0.0266 = (1 + r)^7

r = 0.0254 or 2.54%

Using this yield to maturity, we can calculate the price of the bond after 5 years as:

Bond price = 1000 / (1 + 0.0254)^5

Bond price = $914.50

Therefore, the correct answer is B) $914.50.

Assume That the Following Data on U