[f19l]

Please see attachd document for assignment questions, which I need answered asap. Thanks.

[excon]

Hello f:

I don't see no attachments... And, I really wanted to answer your question, too.

excon

[Clough]

Hi, f19l!

I don't see any attachments either.

Hmmm... If this is for an assignment that is for you to learn how to do something, then how would us just giving you the answers be helping you to learn, please?

I, and I know, a bunch of others here, who would love to help you in learning how to answer the questions, but I really don't see the benefit to you if I or we were to just simply give you the answers without some input first from you as to what you thought the answers are.

Thanks!

[f19l]

I am trying to answer the questions myself in order to make sure that I understand how to solve them but in parallel to that I would also like to know that someone else is going through them as well so that I can see how far I am from the correct answers. I will try to attach the document otherwise I will post the questions on the message board.

[f19l]

Hello, the file is too big to attach so please find below the questions.

Problem 1: A 7-year government bond makes annual coupon payments of 4% and offers a
yield of 3% annually compounded. Suppose that one year later the bond still yields 3%. What
return has the bondholder earned over the 12-month period? Now suppose instead that the bond
yield is 2% at the end of the year. What return would the bondholder earn in this case?

Problem 2: A 6% six-year bond yields 12% and a 10% six-year bond yields 8%. Calculate the
six-year spot rate. Assume annual coupon payments.
Problem 3: In the remote country of Krakovia, in Eastern Europe, observed spot rates are as
follows:
Year Spot (%)
1 5:00
2 5:40
3 5:70
4 5:90
5 6:00
Answer the questions below based on this information.
(a) What are the discount factors for each date, i.e. the present value of $1 paid in year t?
(b) What are the 1-year forward rates for each period?
(c) Calculate the prices of the following government bonds. Assume annual compounding.
i. 5% coupon, two-year maturity.
ii. 5% coupon, five-year maturity.
iii. 10% coupon, five-year maturity.
(d) An annuity is a _fixed-income security that pays the same cash flow in all periods until
maturity, e.g. US$1,000 every year for 3 years. Show that the correct yield to maturity on
a _five-year annuity is 5:75%.
(e) Explain intuitively (no calculations) why the yield to maturity on the 10% bond is less
than that on the 5% bond.
(f) What should the yield to maturity be on a five-year zero coupon bond?
(g) Explain intuitively (no calculations) why the yield on the five-year government bond
described in part (c) must lie between the yield on a five-year zero-coupon bond and a
five-year annuity. What would your answer be if the term structure were downward sloping?
Problem 4:
(a) In a February 2005 issue, The Economist reports that Britain's Treasury floated the
notion of issuing 50-year bonds. The response of pension funds and insurance companies
was, broadly, a loud cheer. This month, France's treasury commissioned a group of banks to
find out whether a 50-year bond in euros would go down well. Why would these institutions
benefit from the issue of these new assets, and how?
(b) Assume a at term structure at 5%. A bank has an asset base that delivers cash flows
for the next 5 years as shown in the table below. It wishes to structure its liabilities so as
to match the present value and duration of its assets. Two bonds (A and B) are available to
the bank as liabilities and their respective cash flows are shown below.
Year 1 2 3 4 5
Assets 400 450 600 200 300
Bond A 8 8 8 8 108
Bond B 0 0 0 100 0
i. Calculate the quantities of the two bonds that the bank should use to meet its
objectives.
ii. Check that the value and duration of the bond portfolio match those of the asset
cash flow stream.
(c) Do we need the at term structure assumption? Why or why not?

Problem 5: In the following table, Treasury bond prices are presented, expressed as a percent
of face values. Coupons are paid on a semi-annual basis (they are annualized).
Treasury Bond Prices (as of 15 February 2009)
Coupon Maturity Price
7:875% 15=08=2009 101:40
14:250% 15=02=2010 108:98
6:375% 15=08=2010 102:16
6:250% 15=02=2011 102:57
5:250% 15=08=2011 100:84
(a) Given the market prices and the coupons in the table, find the prices of the zero coupon
bonds.
Assume now you have the following additional information about Treasury Bond Prices as of
15 January 2009.
Treasury Bond Prices (as of 15 February 2009)
Coupon Maturity Price
13:375% 15=08=2009 104:080
10:750% 15=02=2011 110:938
5:750% 15=08=2011 102:020
11:125% 15=08=2011 114:375
Can there any arbitrage trading take place given this additional information? Identify the profit
one could make from arbitrage trading, if any (discuss one example).

[ScottGem]

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