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Week 2 Tute HWK

This document provides instructions for questions related to bond pricing based on a tutorial. It includes details of a bond such as its coupon rate, maturity date, and cash flow timeline. It asks the student to: 1) Draw a cash flow timeline for the bond 2) Calculate the settlement and quoted price of the bond using the provided yield 3) Explain if the bond is priced below, at, or above par value 4) Generate a time series of settlement and quoted prices as an exercise

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86 views2 pages

Week 2 Tute HWK

This document provides instructions for questions related to bond pricing based on a tutorial. It includes details of a bond such as its coupon rate, maturity date, and cash flow timeline. It asks the student to: 1) Draw a cash flow timeline for the bond 2) Calculate the settlement and quoted price of the bond using the provided yield 3) Explain if the bond is priced below, at, or above par value 4) Generate a time series of settlement and quoted prices as an exercise

Uploaded by

permafrostXx
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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BOND PRICING DUE IN WEEK 2

The following questions refer to the on! series th"t is !eter#ine! $ the !"$ of $our tutori"l "s suggeste! $ the l"st %olu#n of the t" le& Thurs ' (ri) Cou*on r"te) -"turit$) 1iel! 2, *&"&3) +&2+, -"r 2./0 4&50+

i3 Dr"w " ti#eline of %"sh flows of the on!&

ii3 Use the "**ro"%h "s illustr"te! in the le%ture notes "n! 6e%tion 2&5 of 1i* 22..+3 to %o#*ute the settle#ent *ri%e "n! the quote! *ri%e of the on!& Todays date is 25/07/08 (Friday) settlement date is 207.87.9 (N.B. settlement date is 2 working days after t e release date) !at"rity date is at /+7.57.0 #ay fa$e %al"e &'00 on t is date #ay interest e%ery si( mont s on '5t !ar$ and )e*tem+er, +etween now and "ntil +ond mat"res. -nn"al interest ./ $100 0.0525 = $5.25 $100 0.0525 = $2.625 0o"*on interest *er si( mont s ./ 2 1sing met od as *er te(t+ook and le$t"re notes, we get2 1 ( 1 + 0.031975 ) p ' = $2.625 0.031975 = 91.3405002 T is +ond is $"m3interest, sin$e t ere are 45 days from settlement to t e ne(t $o"*on date. T erefore, fra$tional *eriod is denoted f and defined2 number of days between settlement date and next coupon payment date number of days between pre !ous and next coupon payment dates number of days between 29"07"0# and 15"09"0# = number of days between 15"03"0# and 15"09"0# 4# = 1#4 p '+ CPP P0 = f ( 1+ r ) f = = 91.3405002 + 2.625
21

$100

( 1 + 0.031975 )

21

( 1 + 0.031975) 1#4

4#

= $93.197

T is means t at t e +"yer will *ay t e seller &56.'57 two working days later t an T"esday, 25t 7"ly 2008.

8n T "rsday, 6'st 7"ly 2008, t e +ond is $"m interest and we a%e s own t at its *ri$e will +e &56.'57 w en t e 9T! is :.655;. T e following *ri$e will +e <"oted in t e market instead2 Padj = P0 CPP ( 1 f ) 4# = $93.197 2.625 1 1#4 = $91.257 iii3 Is the on! *ri%e! elow: the s"#e "s: or " o;e the f"%e ;"lue< E=*l"in the o ser;"tion& T e +ond is *ri$ed +elow t e fa$e %al"e. T is is +e$a"se t e $o"*on interest rate is signifi$antly lower t an t e yield to mat"rity, w i$ means t at t e +ond *ays a $o"*on interest t at is lower t an t at re<"ired +y t e market. T "s in%estors a%e to *ay less for t is +ond t an its fa$e %al"e to offset t e lower $o"*on interest. i;3 Use the "**ro"%h "s illustr"te! in the on! *ri%ing wor>sheet ?BP@2A "n! 6e%tion 2&B of 1i* 22..+3: to %o#*ute the settle#ent *ri%e "n! quote! *ri%e of the on!&

;3 Tell us the !ifferen%e etween the settle#ent *ri%e "n! the quote! *ri%e& T e s*reads eet does not deal wit $"m3interest +onds, and en$e t e $al$"lated settlement *ri$e and <"oted *ri$e is wrong.

2& Gener"te " ti#e series of settle#ent "n! quote! *ri%es "s require! $ Pr"%ti%e E=er%ise 5 in the on! *ri%ing wor>sheet ?BP@2A& 1i* 22..+3 6ession 2: !is%ussion question 2DC3 B to E& 1ou #"$ "tte#*t DC B to E with the use of " %"l%ul"tor or E=%el& )ee o%erleaf for answers to <"estion 2 and => B to ?.

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