TAPMI

Batch: 2011-13
Fixed Income Securities
Homework
50 Marks
Question-I: 5 marks
You have just taken a 4 year mortgage loan for $ 200,000. The
annual interest rate is 7.50 and payments have to be made in Equated Monthly
Installments.
Draw up an amortization schedule.
Question-II: 5 marks
Use the data given in Question-I. Assume that the investor makes a balloon
payment of $25,000 at the end. Rework the amortization schedule.
Question-III: 10 marks
An investor with a five year investment horizon is considering
purchasing a seven year 9% coupon bond selling at par. He expects that each
coupon can be reinvested at 9.4% per annum, and that the YTM of a two-year
bond after five years will be 11.2%.
a) If he holds the bond till maturity what is his Realized Compound Yield?
b) If he sells the bond after five years, what is his Horizon Yield?
Question-IV: 8 marks
Assume that today is 1 September 2010. There is a T-bond
maturing on 1 February 2030. It has a face value of $ 100,000 and pays an
annual coupon of 8% per annum on a semi-annual basis on 1 February and 1
August every year. The current YTM is 10% per annum.

a) What will be the dirty price of the bond?

b) What will be the clean price of the bond?
Question-V: 5 marks
Consider a bond with a face value of $1,000 and eight years to maturity. It pays a
coupon of 8% per annum on a semi-annual basis. The dirty price is $845.
Calculate the YTM using the approximate YTM approach.
Question-VI: 7 Marks
Consider a bond with a face value of $1,000 and 9.80 years to maturity. It pays
coupons at the rate of 7.50% per annum on a semi-annual basis. The YTM is
8.40% per annum. Compute the duration using the long method.
Question-VII: 10 Marks
Consider the following bonds. Assume that all of them have a face value of
$1,000, and pay coupons on a semi-annual basis.
BOND
Alpha
Charlie
Tango
Zenith
.

Time to Maturity
7.50 years
9.00 years
10 years
8 years

YTM per annum

Coupon per

6%
7%
8%
8%

annum
7.75%
8.00%
8.25%
7.25%

a) Calculate the approximate portfolio YTM.

b) Calculate the exact portfolio YTM.

Q.6

FV
Time to
maturity
coupon
YTM

1000
9.8
7.50%
8.40%

Durati
on
Time

Cash
flow

PV of Cash
Flow

Weight of Cash
Flow

Weighted
time

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
19.6

37.5
37.5
37.5
37.5
37.5
37.5
37.5
37.5
37.5
37.5
37.5
37.5
37.5
37.5
37.5
37.5
37.5
37.5
37.5
1022.5

$35.99
$34.54
$33.15
$31.81
$30.53
$29.30
$28.12
$26.98
$25.90
$24.85
$23.85
$22.89
$21.97
$21.08
$20.23
$19.42
$18.63
$17.88
$17.16
$456.52

0.03825404
0.03671213
0.035232371
0.033812256
0.032449382
0.031141441
0.02988622
0.028681593
0.027525521
0.026416047
0.025351293
0.024329456
0.023348806
0.022407683
0.021504495
0.020637711
0.019805864
0.019007547
0.018241408
0.485254734

0.03825404
0.073424261
0.105697112
0.135249024
0.16224691
0.186848648
0.209203541
0.229452746
0.247729692
0.264160473
0.278864223
0.291953471
0.303534478
0.313707567
0.322567418
0.330203371
0.336699695
0.342135853
0.346586757
9.510992791

Total

$940.78

14.03

The weighted average time to maturity is 14.03 semi-annual

periods or 7.015 years

Q.7

YTM per
annum

Coupon per
annum

BOND

Time to Maturity

Alpha

7.50 years

6%

7.75%

Charlie 9.00 years

7%

8.00%

Tango

10 years

8%

8.25%

Zenith

8 years

8%

7.25%

a)

Approximate
YTM
Time to
Maturity

Bond
Alpha
Charlie
Tango
Zenith

YT
M

7.5
9
10
8

6
7
8
8

Durati
on

wt average YTM using

Duration as Wt.

5.92
6.67
7.025
6.66

1.286956522
1.74
2.036231884
1.544347826

6.607536
232

YTM
b)

Alpha
Charlie
Tango
Zenith
$1,104.4 $1,065. $1,016. $956.
6
95
99
30

PV of
Bond

Portfolio IRR

Period

0
1
2
3

Investme
nt

Inflow
from
Alpha

Inflow
from
Charlie

Inflow
from
Tango

Inflow
from
Zenith

Total

36.25
36.25
36.25

($4,143.
70)
$156.25
$156.25
$156.25

($4,143.
70)
38.75
38.75
38.75

40
40
40

41.25
41.25
41.25

4
5
6
7
8
9
10
11
12
13
14

40
40
40
40
40
40
40
40
40
40
40

41.25
41.25
41.25
41.25
41.25
41.25
41.25
41.25
41.25
41.25
41.25

36.25
36.25
36.25
36.25
36.25
36.25
36.25
36.25
36.25
36.25
36.25

40

41.25

16
17

40
40

41.25
41.25

36.25
1036.
25

18
19

1040

41.25
41.25
1041.
25

15

20

38.75
38.75
38.75
38.75
38.75
38.75
38.75
38.75
38.75
38.75
38.75
1038.7
5

Portfolio
IRR
Therefore the Approximate YTM of portfolio is 6.60% and
exact YTM is 4%

$156.25
$156.25
$156.25
$156.25
$156.25
$156.25
$156.25
$156.25
$156.25
$156.25
$156.25
$1,156.2
5
$1,117.5
0
$81.25
$1,081.2
5
$41.25
$1,041.2
5

4%