Scribd Logo
Upload

Welcome to Scribd!

  • 285 views

    This Study Resource Was: Asc714 - Assignment 3 September 20, 2018 Chapter 12: The Bond Market

    Uploaded by

    Fazal Rehman Mandokhail
    The document discusses bond pricing and yields. It provides the price of a 10-year bond with a 7% coupon rate given market rates of 5%. It then compares the yields of a 2-year zero-coupon bond priced at $819 to a 2-year annuity priced at $1,712.52. The zero-coupon bond has a higher yield of 10.5% compared to the annuity's 8.07% yield, making it the better investment. The document also presents cash flows over 4 years and calculates the price, expected future value after 2.5 years, duration of 2.5 years, and impact on value of a drop in market rates.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    This Study Resource Was: Asc714 - Assignment 3 September 20, 2018 Chapter 12: The Bond Market

    Uploaded by

    Fazal Rehman Mandokhail
    285 views2 pages
    The document discusses bond pricing and yields. It provides the price of a 10-year bond with a 7% coupon rate given market rates of 5%. It then compares the yields of a 2-year zero-coupon bond priced at $819 to a 2-year annuity priced at $1,712.52. The zero-coupon bond has a higher yield of 10.5% compared to the annuity's 8.07% yield, making it the better investment. The document also presents cash flows over 4 years and calculates the price, expected future value after 2.5 years, duration of 2.5 years, and impact on value of a drop in market rates.

    Original Description:

    Cover Bond Valuation

    Original Title

    The Bond Market 12

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses bond pricing and yields. It provides the price of a 10-year bond with a 7% coupon rate given market rates of 5%. It then compares the yields of a 2-year zero-coupon bond priced at $819 to a 2-year annuity priced at $1,712.52. The zero-coupon bond has a higher yield of 10.5% compared to the annuity's 8.07% yield, making it the better investment. The document also presents cash flows over 4 years and calculates the price, expected future value after 2.5 years, duration of 2.5 years, and impact on value of a drop in market rates.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    285 views2 pages

    This Study Resource Was: Asc714 - Assignment 3 September 20, 2018 Chapter 12: The Bond Market

    Uploaded by

    Fazal Rehman Mandokhail
    The document discusses bond pricing and yields. It provides the price of a 10-year bond with a 7% coupon rate given market rates of 5%. It then compares the yields of a 2-year zero-coupon bond priced at $819 to a 2-year annuity priced at $1,712.52. The zero-coupon bond has a higher yield of 10.5% compared to the annuity's 8.07% yield, making it the better investment. The document also presents cash flows over 4 years and calculates the price, expected future value after 2.5 years, duration of 2.5 years, and impact on value of a drop in market rates.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    ASC714 – ASSIGNMENT 3 September 20, 2018

    CHAPTER 12: THE BOND MARKET


    1. You are considering buying a bond that matures in 10 years from today. The par value of the
    bond is $10,000 and the coupon rate is 7%. If the current market interest rates are 5%, what
    is the bond price today if the coupon is paid annually.

    𝑛 = 10 𝑦𝑒𝑎𝑟𝑠
    𝐹 = $10,000
    𝑟 = 0.07
    𝑖 = 0.05

    𝑃 = 𝐹𝑟𝑎𝑛⌉𝑖 + 𝐹𝑣𝑖𝑛
    10
    𝑃 = 10,000(0.07)𝑎10⌉0.05 + 10,000 𝑣0.05
    1 − (1 + 0.05)−10 1
    𝑃 = 10,000(0.07) [ ] + 10,000 [ ]
    0.05 (1 + 0.05)10
    𝑃 = $11,544.34699

    m
    er as
    co
    eH w
    4. A two-year $1,000 par zero-coupon bond is currently priced at $819.00. A two-year $1,000
    annuity is currently priced at $1,712.52. If you want to invest $50,000 in one of the two

    o.
    securities, which is a better buy? (Hint: Compute the yield of each security.)
    rs e
    ou urc
    Zero-coupon bond Annuity
    𝐹𝑉 = $1,000 𝐹𝑉 = $1,000 × 2
    𝑃𝑉 = $819 𝑃𝑉 = $1,712.52
    o

    𝑛=2 𝑛=2
    aC s

    𝐹𝑉 = 𝑃𝑉(1 + 𝑖)𝑛 𝐹𝑉 = 𝑃𝑉(1 + 𝑖)𝑛


    vi y re

    1 1⁄
    1,000 ⁄2 2,000 2
    𝑖=( ) −1 𝑖=( ) −1
    819 1,712.52
    𝑖 = 0.1049892402 𝑖 = 0.08068014339
    ed d

    𝑖 = 10.5% 𝑖 = 8.07%
    ar stu

    ∴ 𝑇ℎ𝑒 𝑧𝑒𝑟𝑜 − 𝑐𝑜𝑢𝑝𝑜𝑛 𝑏𝑜𝑛𝑑 𝑖𝑠 𝑡ℎ𝑒 𝑏𝑒𝑡𝑡𝑒𝑟 𝑏𝑢𝑦


    sh is
    Th

    https://www.coursehero.com/file/48590238/ASSIGNMENT-3pdf/
    ASC714 – ASSIGNMENT 3 September 20, 2018
    CHAPTER 12: THE BOND MARKET
    5. Consider the following cash flows. All market interest rates are 12%.
    Year 0 1 2 3 4
    Cash Flow 160 170 180 230

    a. What price would you pay for these cash flows? What total wealth do you expect after 2.5
    years if you sell the rights to the remaining cash flows? Assume interest rates remain
    constant.
    b. What is the duration of these cash flows?
    c. Immediately after buying these cash flows, all market interest rates drop to 11%. What
    is the impact on your total wealth after 2.5 years?

    a)
    𝐶1 𝐶2 𝐶3 𝐶4
    𝑃𝑟𝑖𝑐𝑒 = + + +
    (1 + 𝑖) (1 + 𝑖)2 (1 + 𝑖)3 (1 + 𝑖)4

    m
    160 170 180 230

    er as
    𝑃𝑟𝑖𝑐𝑒 = + 2
    + 3
    +
    (1.12) (1.12) (1.12) (1.12)4

    co
    𝑃𝑟𝑖𝑐𝑒 = $552.6697047

    eH w
    o.
    𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑊𝑒𝑎𝑙𝑡ℎ = 𝐶1 (1 + 𝑖)2.5−1 + 𝐶2 (1 + 𝑖)2.5−2 + 𝐶3 (1 + 𝑖)2.5−3 + 𝐶4 (1 + 𝑖)2.5−4
    rs e
    𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑊𝑒𝑎𝑙𝑡ℎ = 160(1.12)1.5 + 170(1.12)0.5 + 180(1.12)−0.5 + 230(1.12)−1.5
    ou urc
    𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑊𝑒𝑎𝑙𝑡ℎ = $733.6868167

    b)
    𝐶1 𝐶2 𝐶3 𝐶4
    o

    (1) + (2) + (3) + (4)


    (1 + 𝑖) (1 + 𝑖)2 (1 + 𝑖)3 (1 + 𝑖)4
    aC s

    𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 =
    𝑃
    vi y re

    160 170 180 230


    (1) + (2) + (3) + (4)
    (1.12) (1.12)2 (1.12)3 (1.12)4
    𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 =
    552.6697047
    ed d

    𝐷𝑢𝑟𝑎𝑡𝑖𝑜𝑛 = 2.502292084
    ar stu

    c)
    𝑖 = 0.11
    𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑊𝑒𝑎𝑙𝑡ℎ = 𝐶1 (1 + 𝑖)2.5−1 + 𝐶2 (1 + 𝑖)2.5−2 + 𝐶3 (1 + 𝑖)2.5−3 + 𝐶4 (1 + 𝑖)2.5−4
    sh is

    𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑊𝑒𝑎𝑙𝑡ℎ = 160(1.11)1.5 + 170(1.11)0.5 + 180(1.11)−0.5 + 230(1.11)−1.5


    𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑊𝑒𝑎𝑙𝑡ℎ = $733.7401412
    Th

    https://www.coursehero.com/file/48590238/ASSIGNMENT-3pdf/

    Powered by TCPDF (www.tcpdf.org)

    You might also like