Fixed Income – Assignment

Question 1
a) Price of bonds:

Bond Coupon Payment Number of Yield to

per period periods to maturity (%)
maturity
1 4 5 5%
2 2.5 2 4%

Using Financial calculator

Bond 1 Bond 2
FV=$100 FV=$100
PMT=$4 PMT=$2.5
N=5 N=2
1/y =5% 1/y =4%
CPT PV= $95.67 CPT PV= $97.17

b) Since the coupon rate is lower than the required yield, the bond is being sold at discount.

2. First we need to calculate the yield to maturity of the two bonds A and B
Bond A
FV= $-100 PMT=$-5 PV=$106 N=3 CPT 1/Y=2.88%
Required yield on Bond A=2.88%

Bond B
FV= $-100 PMT=$-5.50 PV=$102 N=6 CPT 1/Y=5.10%
Required yield on Bond B=5.10%

The estimated market discount rate for a 5-year bond having the same credit quality is
the average of two required yields A and B:

Required yield on Bond C=3.99% (2.88%+5.10%/2)

The price of the non-traded bond C is as follows:

N= 5 FV=-$100, PMT=-$4 1/Y=3.99% CPT PV=100.04

Value of Bond C=$100.04

Question 2
Bond Coupon Payment Annual Coupon ($) Price (per $100 of
Frequency par)
A Semiannual 8 95
B Quarterly 9 100
C Semiannual 0 10

1
Assignment – Fixed Income
a) Current Yield = Annual Cash coupon payment
Bond Price

Bond A: 8/95 =0.08=8.42%

Bond B: 9/100 =0.09 =9.00%

b) Effective Annual Rate

Bond A

First we must calculate the yield to maturity

PV=$95 FV=-$100, N=2*2=4, PMT= (-$8/2=-$4) CPT 1/Y=5.42%

Effective annual yield= (1+0.0542)2-1=0.11 =11.13%

Bond B
PV=$100 FV=-$100, N=2*4=8, PMT= (-$9/4=-$2.25) CPT 1/Y=%2.25%

Effective annual yield= (1+0.0225)4-1=0.09 =9.31%

c) i Accrued interest for Bond C

AI=t/T×PMT

Where:
AI = Accrued interest.
t = Number of days from the last coupon payment to the settlement date.
T = Number of days from the last coupon payment date to the next coupon payment date.
PMT = Coupon payment.
From Jan to March 2020 =90days
Semiannual 1st July 2020- Dec 2020 =6*30=180

Taking into consideration 30/360 conversion

=90/180 x5 =$2.50

ii Full price of bond = PVFull=PV×(1+r)t/T

N=2x2 =4 PMT=10/2=-$5 FV=-$100 I/y=5/2=2.50% CPT PV=$109.40
Full price of Bond C=109.40x (1.025)90/180=$110.76
a)
iii Flat Price =PVFlat= PVFull - AI
=$110.76-$2.50 =$108.26

2
Assignment – Fixed Income
Question 3
Bond Coupon Payment Years to maturity Price (per 100 of
par)
1 - Corporate Bond 6 2 103.5
2-Government Bond 4 2 101.5

a) Yield to maturity for Corporate bond

N=2 PMT=-6 FV=-100 PV=103.50 CPTI/Y=4.14%

Yield to maturity for Government bond

N=2 PMT=-4 FV=-100 PV=101.50 CPTI/Y=3.21%

b) G spread: G =Yc -Yg = (0.0414-0.0321) =0.93%

c) Zero Volatility Spread is 1.17%
We solve for the value of the corporate bond using z1 = 0.02, z2 = 0.03, and Z = 0.0117.
The resulting value must equal $103.5 if the z-spread is indeed 0.0117.
= 6 + 106
------------------- -------------------
(1+0.02+0.0117) (1+0.03+0.0117)2

=103.499=$103.5

d) (1+2s0)1(1+1f2) =(1+3s0)3
=1.02*(1+1f2)= 1.0353
=1+1f2= 1.0353 -1 =4.26%
1.02
e) (1+1s0) (1+1f1)=(1+2s0)2
=
(1+0.02)(1+1f1)=(1+0.03)2
(1+1f1)= 1.03 2
1.02
=1.06/1.02=1.04-1=4.01%

f) (1+2s0)2(1+1f2) =(1+3s0)3
=1.032=1.0353
1+1f2= 1+0.035 3
(1.03)2
=
1.11/1.06 =1.05-1 =4.72%

3
Assignment – Fixed Income