ADVANCED:
Let me lead you along in working out how you can "STRIP" a Treasury coupon bond. Assume the 12-month Treasury note costs $10,065.22 and pays a coupon of $150 in 6 months, and interest plus coupon of $10,150 in 12 months. (Its payment patterns indicate that it was originally issued as a "3% semiannual, level-coupon note.") Now assume the 6-month Treasury bill costs $10,103.96 and has only one remaining coupon-plus-principal payment of $10,200. (It was originally issued [and perhaps many years ago] as a "4% semiannual, level-coupon bill.")
(a) What is the YTM of these two Treasuries?
(b) Graph a yield curve based on the maturity of these two Treasuries.
(c) What would be the price of a 1-year zero note?
(d) Graph a yield curve based on zero notes.
(e) Do the yield differences between the 1-year zero note and the 1-year coupon note seem large to you?