Study Treasury Strip Yields and Cash Flow Analysis

Case Study Treasury Strip Yields and Cash Flow Analysis 

This section illustrates the process of yield and cash flow analysis through the Bloomberg screens for the 4 percent Treasury maturing on February 15, 2014 —the 10-year benchmark during 2004—and its principal and coupon strips maturing on February 15, 2014. 

FIGURE 17.14 shows the cash flows received by a holder of 1 million nominal of the Treasury, together with the corresponding spot rates. On the trade date—March 25, 2004, for settlement on March 26—the bond was priced at 99-19+, for a yield of 4.0479 percent, and its convexity was 0.770. 

FIGURE 17.15 shows the cash flow for the Treasury s principal strip. Its yield is 4.0751 percent, corresponding to a price of 67.10027 per 100 nominal, which represents a spread above the gross redemption yield of the coupon Treasury. This relationship is expected, given a positive yield curve. There is only one cash flow the redemption payment, which equals 1 million for a holding of 1 million nominal. The principal strip s convexity is higher than the coupon bond s, as is its duration, again as expected. 

FIGURE 17.15 Cash Flow Analysis of the 4 Percent Treasury P0I4 Principal Strip, at a Yield of 4.075 Percent 

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