Assignment 1 Answer

conEcon345 Money and Banking Assignment 1
Zhongli Sui (Bill) 31438104

a). What is YTM(i) for bond A and B? which one is highest? Bond A: 1000 = 1001+i + 901+i2 + 80(1+i)3 + 70(1+i)4 + 60(1+i)5 + 600(1+i)5 i(A) = 0 Bond B: 1000 = 1001+i + 1001+i2 + 100(1+i)3 + 100(1+i)4 + 40(1+i)5 + 400(1+i)5 i(B) = - 0.04419415 Bond A has higher yield than Bond B. ( 0 > -0.044195)

b). Suppose i=0.05 for both bond A and B, which bond has higher price? Bond A:
P = 1001+0.05 + 901+0.052 + 80(1+0.05)3 + 70(1+0.05)4 + 60(1+0.05)5 + 600(1+0.05)5 = $820.69
Bond B:
P = 1001+0.05 + 1001+0.052 + 100(1+0.05)3 + 100(1+0.05)4 + 40(1+0.05)5 + 400(1+0.05)5 = $699.35

c). Is there an identical i that i(t)=i(t+1)=i(t+2)=… that makes bond price for A and B identical?

1001+i + 901+i2 + 80(1+i)3 + 70(1+i)4 + 60(1+i)5 + 600(1+i)5
= 1001+i + 1001+i2 + 100(1+i)3 + 100(1+i)4 + 40(1+i)5 + 400(1+i)5
When i = 100%, both bond A and bond B have price equal to $107.50

Which bond is more risky?
If all the information is correct, bond A is more risky in year 1 to 4, and bond B is more risky at year 5 due to the CEO resign.