You have just purchased a zero-coupon 3 year Treasury note with a face amount of $10,000. The price was $9,150.00.

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 2%. The Fed also stated that it would continue to intervene in the market to keep the yield at 2%. What is the difference between the yield of your purchase and the Fed's 2% targeted yield?

b. What is the amount of your capital gain or loss on the purchase and sale of the 3-year notes if you sell your notes tomorrow?


.. Does anyone know how to find out the yield of the note that was bought in the beginning?

With respect to (a), your yield is locked in if you hold to maturity, as it is solely a function of the price you paid and the maturity payoff. Sounds like you're asking how to compute it...

\sqrt[n]{\frac{M}{P}}\ -\ 1

... using as your arguments: the number of periods; the Maturity amount; and the original Purchase price.

For part (b), use a simple discounting formula to find the price of the instrument that would result in a 2% yield to maturity.

\frac{10,000}{1.02^3}

This gives the amount you'd sell for tomorrow, if the market yield fell to 2% as a result of the Fed action. Compare that to your original purchase price to find your gain or loss.

Cheers!