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Treasury Bills: Valuation, Interest Rate Impact, and Liquidity Analysis

This assignment covers the valuation of treasury bills and analyzes how interest rates and liquidity affect their pricing.

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    Treasury Bills: Valuation, Interest Rate Impact, and Liquidity Analysis, page 1Treasury Bills: Valuation, Interest Rate Impact, and Liquidity Analysis1.A corporate bond has atime to maturity of 15 years, acoupon rate of 4% paid semiannually, andapar value of $1,000.(a) Given that therisk-free rate is0.5%and therisk premium is 2%, calculate the required rate ofreturn and determine thevalue of the bondusing semiannual compounding.(b) If therisk-free rate declines by 25 basis points, recalculate the required rate of return anddetermine thenew value of the bond.(c) Explain the impact of the interest rate decline on the bond's value.Answer:1)Given that,Time to maturity=15 yearsCoupon rate=4% paid semiannuallyPar value=$1,000(a)We have,Risk free rate=0.5%Risk premium=2%Therefore,π‘…π‘’π‘žπ‘’π‘–π‘Ÿπ‘’π‘‘π‘Ÿπ‘Žπ‘‘π‘’π‘œπ‘“π‘Ÿπ‘’π‘‘π‘’π‘Ÿπ‘›=0.5%+2%=2.5%For semiannual compounding:Coupon payment=$1000*(4%/2)=$20Number of payments=15*2=30Required rate of return=2.5%/2=1.25%Now,π‘‰π‘Žπ‘™π‘’π‘’π‘œπ‘“π‘π‘œπ‘›π‘‘=βˆ‘$20(1+1.25%)𝑑30𝑑=1+$1000(1+1.25%)30=$1,186.67(b)If interest rate declines by 25 basis point:Risk free rate=0.5%-0.25%=0.25%π‘…π‘’π‘žπ‘’π‘–π‘Ÿπ‘’π‘‘π‘Ÿπ‘Žπ‘‘π‘’π‘œπ‘“π‘Ÿπ‘’π‘‘π‘’π‘Ÿπ‘›=0.25%+2%=2.25%For semiannual compounding:Required rate of return=2.25%/2=1.125%And,

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    Treasury Bills: Valuation, Interest Rate Impact, and Liquidity Analysis, page 2

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