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Question about zero-coupon treasury note?
I tryin to do my finance homework and i been tryin to figure this problem out for like half an hour. Can someone please help me or point me in the right direction thanks.............................................You have just purchased a zero-coupon 3-year Treasury note with a face amount of $10,000. The price was $902.00.
a. As you walk home, you hear that the Federal Reserve has just purchased a large volume of 3-year Treasury notes, driving down their yield to 1%. The Fed also stated that it would continue to intervene in the market to keep the yield at 1%. What is the difference between the yield of your purchase and the Fed’s 1% targeted yield?
b. If you decide to sell your 3-year note tomorrow, what yield will the buyer of your note obtain? Why?
c. What is the amount of your capital gain or loss on the purchase and sale of the 3-year notes?
Answer:
I think you meant that the face value is $1,000, not $10k. The interest rate would be astronomically high if $10k.
Assuming it is $1,000, here are the answers:
a. If you paid $902, your implied interest rate is found by solving $902 * (1+i) ^ 3. You'll find that i = 3.5%. In other words, if you invest $902 at 3.5% for 3 years, you'll have $1,000. So by purchasing the note for $902 and collecting $1,000 at maturity is implying that you're getting 3.5% on your money per year. So the difference between your 3.5% rate and the new 1% rate is 2.5%.
b. If you sell your note tomorrow, the market price will have adjusted so that the new buyer receives 1%. In other words, the price of your note is relatively too low with interest rates at 1%. The market will bid the price higher thus driving down the interest rate. At what point will the bidding stop? When the interest rate is 1%.
c. The new price is found by x * (1.01) ^ 3 = $1,000. You'll find that x = $970.60. In other words, the market will bid the price of your note to $960, which is the price that makes the yield equal to 1%. If you sell your note now, your capital gain is $68.60, which is the difference between the $902 purchase price and the $970.60 market price.
 Richmond, VA- Virginia Treasury Note $50 Oct. 15, 1862 Fine US $95.00 
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 1862, $1.00, Virginia Treasury Note, Oct. 21, 1862 (P-24) US $19.95
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 1891 $1 Dollar United States Treasury Large Note CUR155 US $395.00
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 TT 1890 $5 TREASURY NOTE ORNATE BACK SCARCE FR # 359 PMG 45 US $5,950.00
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 TT 1890 $10 TREASURY NOTE FANCY BACK FR # 366 PCGS 40 US $8,950.00
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 1891 $1 TREASURY NOTE US $45.00
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 1917 $2 US TREASURY NOTE SPEELMAN-WHITE US $58.50
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 1862 $1 VIRGINIA Treasury Note CIVIL WAR era US $24.99
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 1869 $5 "PIONEER FAMILY RAINBOW" TREASURY NOTE - "A. JACKSON" - OVERSIZED COPY US $16.95
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 1862 $5 "STATUE OF LIBERTY" TREASURY NOTE, "ALEXANDER HAMILTON" - OVERSIZED COPY US $16.95
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 1862 Virginia Treasury Note $1 US Obsolete Currency CUR411 US $39.99
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 1862 Virginia Treasury Note $1 US Obsolete Currency CUR412 US $58.59
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 Richmond, VA - Virginia Treasury Note $100 Oct. 15, 1862 PMG AU-55 US $395.00
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 B121 FUN '89 BEP Souvenir Card $50 Treasury Note 1891 (face) Mint US $7.50
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 B139 DCSE '90 BEP Souvenir Card $10 Treasury Note back 1890 Mint US $9.00
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 B143 Westex '90 BEP Souvenir Card $2 Treasury Note 1890 back Mint US $9.00
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 B148 IPMS 1991 BEP Souvenir Card $20 Treasury Note 1890 face Mint US $10.00
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 1862 $5.00 Virgina Treasury Note US $42.50
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 1891 $1.00 US TREASURY NOTE BANKNOTE UNITED STATES NOTE LARGE NOTE CURRENCY RARE US $225.00
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 BEP souvenir card B 139 DCSE 1990 back 1890 $10 Treasury Note ornate back US $14.00
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 BEP souvenir card B 148 IPMS 1991 face 1890 $20 Treasury Note John Marshall US $14.00
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 BEP souvenir card B 257A Long Beach 2001 untitled face 1890 $100 Treasury Note US $32.00
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 BEP souvenir card B 258 FUN 2002 face proposed 1899 $1 Treasury Note Black Eagle US $14.00
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 BEP souvenir card B 260 TNA 2002 back proposed 1899 $1 Treasury Note US $14.00
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 BEP souvenir card B 261 ANA 2002 face proposed 1899 $2 Treasury Note Washington US $14.00
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 BEP souvenir card B 264 Long Beach 2002 back proposed 1899 $2 Treasury Note US $14.00
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 BEP souvenir card B 275 Long Beach 2005 back 1890 $20 Treasury Note battleship US $32.00
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 BEP souvenir card B 286 ANA Summer 2007 back 1891 $5 Treasury Note Rehnquist US $32.00
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 1863 State of Alabama 50 Cent Note Confederate States Treasury Note US $10.00
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 B251A FUN 01 BEP Souvenir Card untitled variety $2 Treasury Note 1890 Mint US $25.00
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 B252A IPMS 01 BEP Souvenir Card untitled variety $5 Treasury Note 1890 Mint US $25.00
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 B254A ANA 01 BEP Souvenir Card untitled variety $10 Treasury Note 1890 Mint US $25.00
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 B257A Long Beach 01 BEP Souvenir Card untitled var $100 Treasury Note 1890 Mint US $25.00
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 $20 1891 LARGE *RARE/CERTIFIED* US Treasury "COIN" Note US $3,999.99
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 COPY OF 1869 $5 "RAINBOW WOODCHOPPER" TREASURY NOTE!. US $16.95
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 $10 1863 "CIVIL WAR" TREASURY NOTE!. - OVERSIZED COPY! US $16.95
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 $100 1864 "CIVIL WAR" TREASURY NOTE!. - OVERSIZED COPY! US $16.95
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 BEP souvenir card B 121 FUN 1989 V/C cancel face 1891 $50 Treasury Note Seward US $9.00
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 BEP souvenir card B 139 DCSE 1990 V/C cancel back 1890 $10 Treasury Note ornate US $9.00
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 BEP souvenir card B 143 Westex 1990 V/C cancel back 1890 $2 Treasury Note ornate US $9.00
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 $1 1891 TREASURY COIN NOTE PCGS 66PPQ EXTRAORDINARY Fr 350 US $3,975.00
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 NEW $2 Dollar Bill Red US Treasury Seal - Thomas Jefferson Collector's Note US $19.98
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 $2 1891 LARGE U.S.Treasury Note **PCGS VF-25PPQ** ! US $1,899.99
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 $2 1869 "RAINBOW" TREASURY NOTE!. - OVERSIZED COPY! US $16.95
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