added to the bond’s principal at the end of every day (assume 365 days/year). A. Calculate the annual yield-to-maturity for each of the bonds. Annual yield-to-maturity is the discount rate that makes the present value of the bond’s promised payments equal to the bond price. Equivalently‚ yield-to-maturity is equal to the bond’s internal rate of return. Future Value of the Bond | | Annual Yield to Maturity | FV= | | PV * (1 + r)^t | | | | | | | | | | | | | | | | | |
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both bonds. Coupon rate Time to maturity Yield-to-maturity Bond A 5% 5 yrs 7.2% Bond B 5% 25 yrs 7.2% Recalculate the bonds’ values if the yield to maturity changes to 9.4%. Which bond is more sensitive to the changes in the yield? Will this always be the case? When the yield-to-maturity is 7.2%‚ the bond prices are‚ respectively‚ 1 1 1.036 0.036 1 1.036 0.036 1 1.047 0.047 1 1.047 0.047 25 1000 1.036 1000 1.036 908.98 1 25 746.58 When the yield-to-maturity is 9.4%‚ the bond prices are
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for creating the interest rate-sensitivity gap report? Limitations in the reliability of the interest rate-sensitivity gap as follows: Gap analysis does not capture basis risk or investment risk‚ is generally based on parallel shifts in the yield curve‚ does not incorporate future growth or changes in the mix of the business‚ and doest not account for the time value of money. Moreover‚ simple gap analysis (based on contractual term to maturity) assumes that the timing and amount of assets and
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different maturities cannot get too far out of line. 5. If yield curves on average were flat‚ this would suggest that the risk premium on long-term relative to short-term bonds would equal zero and we would be more willing to accept the pure expectations theory. 6. The flat yield curve at shorter maturities suggests that short-term interest rates are expected to fall moderately in the near future‚ while the steep upward slope of the yield curve at longer maturities indicates that interest rates further
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ANSWER SCHEME ECO551/553 APRIL 2010 QUESTION 1 a) A barter trade system is a system whereby people exchange goods for other goods. ( with example) b) There are many problems facing the barter trade. Three of these problems are: i) Double coincidence of wants ii) Rate of exchange iii) Divisibility ( with explanation) (b) The four functions of money are as follows: i) Medium of exchange ii) Unit of account iii) Store of value iv) Standard for deferred payment
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4 Question 1 We are given two bonds with the same interest rate of 5%‚ and no one of bonds has an embedded option so they will not be exercised prior to the date of maturity. Moreover‚ both bonds are traded in one market and they have identical yield‚ therefore it is irrelevant factor. However‚ two bonds have different term of maturity: bond A matures in 15 years‚ while bond B matures only in 10 years. Fabozzi and Mann (Fabozzi & Mann‚ 2005) stated that the price volatility of the bond is closely
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Business 9203 Section 2 MANAGING FINANCIAL RESOURCES QUIZ June 2011 STUDENT NUMBER _____________________________ You have a maximum of 80 minutes for the quiz. Please provide your answers on this paper in the spaces provided and hand in your paper at the end of the quiz. Only short precise answers are required and you can use point form. The weight given to each question is indicated at the end of the question. The total possible marks are 70. The quiz is open book and you may feel
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In-arrear swaps are popular products in a steep yield curve environment to a fix rate receiver who thinks that short term rates will not rise as fast as the yield curve predicts‚ pocketing up the difference between the fix rate of the standard swap and the one of the in-arrear swap known as the pick up‚ while still paying low Libor resets. Usually‚ clients (corporates or financial institutions) receive fix and pay floating. In a steep yield curve environment‚ because of the delayed resets‚ an in-arrear
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61 Questions for Extra Credit Points. Due 12/16 (Wednesday) (Please show your work and provide your explanation) You need to show your work and explanations. Jotting down only the answers is not acceptable. If you do all 100 questions‚ you will get up to 3 extra points added to your final total score (after I determine your total score based on mid-terms‚ HWs‚ and the final). Chapter 5 1. You plan to analyze the value of a potential investment by calculating the sum of the present values
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Global Trading FINC 6015 Arbitrage Source: Frino Segara (2008) Chapter 3 – Course Text Joakim Westerholm Hui Zheng MARKET COMMENTARY MACRO: Any economic indicators that show the US economy is improving are now perceived as negative news for stock markets as this means the FED can wind back on flooding the market with liquidity created by buying back government bonds. POLITICAL: Syria Australian Reserve bank appears at ease with the weaker dollar and will continue to ease rates:
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