Inputs

Answer
1) a Treasury bills
2) e Negatively Related
YTM- yield to maturity

Bond A Bond B
Par Value $ 1,000.00 Par Value $ 1,000.00
interest Annually $ 120.00 interest Annually $ 120.00
Before YTM 12% Before YTM 12%
After YTM 10% After YTM 10%

Mature Years 5 Mature Years 6

Bond A Bond B
Bond A Increases in Value Bond B Increases in Value

Bond B has more change 3) A

Logic:
If yield to maturity drops, bonds increase in value and the longer duration bond will change higher as we
ond will change higher as well
 Bond F Bond G
Par Value 1000 Par Value 1000
Interest 90 Interest 90
Before YTM 9% Before YTM 9%
After YTM 10% After YTM 10%

Mature Year 15 Mature Year 26

Bond F Bond G
Bond F decreases in value Bond F decreases in value

4) E
more change in bond G
 Inflatiion
in year
just
Time ended Par Value Coupon Payment Principle payment
0 $ 1,000.00
1 1% $ 1,010.00 $ 40.40 $ -
2 2% $ 1,025.15 $ 41.01 $ -
3 3% $ 1,050.78 $ 42.03 $ 1,050.78

Second Year Third Year

Nominal Return 5.56% 6.60%
Real Return 4% 4%

Possible Alternate Way:

Coupon rate is real rate of return, so 8% for both
Use fishere equation to find nominal returns.
total Payment coupon rate 4%

$ 40.40
$ 41.01
$ 1,092.81
key 5%
Year 2
FV/ Par Value $ 1,000.00
PV $ 1,000.00
Coupon Payment $ 120.00

YTM 12.0%

r Proceeds Realized YTM

7% $ 1,248.40 11.73%
9% $ 1,250.80 11.84%
11% $ 1,253.20 11.95%

YTM CHECK
12.0% $ 1,254.40 12.00%

YTM correct
7E
8B
 1 Year zero Coupon bond
YTM Year 1 7.50%

Government of Canada
Year 2
Coupon Rate 10.0%
FV $ 100.00
Coupon Payment $ 10.00

a) $102.74

b) 8.453%

c) forward rate f2 9.509%

 Price year 1 $ 100.45

d) Liquidity Premium 1.50%

Forward Rate 2 9.51%
Expected return Year 2 8.0%

Price $ 101.84
 2- Year zero coupon bond
YTM Year 2 8.50%

(1+fn)=(1+yn )n)/(1+yn-1)n+1
Forward Rate n = (pricen-1)/ (pricen -1)

priceN+1/(1+E(r2)) = priceN

-$99.08
Maturity Years YTM
1 10.50%
2 11.50%
3 12.50%
 Face Value $ 1,000.00

A) Maturity Forward Rate

1 Year 10.50%
2 years 12.51%
3 years 14.53%

B) Next Year . PV YEAR 1

2 YEAR BOND
PV next year $ 888.82

2-year bond 12.51%

the slope shifts upwards, as the yield curive is increasing and upward sloping. Shifts upwards a

C) PV=FV/(1+r)n

PV of first year bond PV of second year bond

$ 904.98 $ 804.36

Next year, two year coupon bond is a one year bond and sell for:

E(r) Two year bond in one year 10.50%

E(r) Three year bond in one year 10.50%

D) coupon rate 10%

Coupon Payment $ 100.00

PV $ 943.50
Expected price 1 year $ 942.57

Total Expected Return 10.50%

(1+fn)=(1+yn)n/[(1+fn-1)*(1+fn-2)*…]
 Price= FV/(1+forward rate)1*(1+forward rate)2
3 Year Bond
PV next year $ 776.08

3-year bond 13.51%

ing and upward sloping. Shifts upwards according to hypothetis.

PV of third year bond

$ 702.33 $ 2,411.67

and sell for:

943.49885823
942.56623834
0
Maturity (Years) Price YTM Forward Rate
1 $ 940.93 6.28%
 2 $ 868.39 7.31% 8.35%
3 $ 800.92 7.68% 8.42%
4 $ 735.40 7.99% 8.91%
5 $ 670.48 8.32% 9.68%

A) 1.1945 price of 3 year bond/ price 5 year b

B) Time Cashflow
0 0 Nocashflow
3 $1,000.00 Buyer, positve cashflow
5 -$1,194.55 -$ 1,194.55 Selling, negative cashflow

C) 2-year Interest rate 19.45%

D) Check method 19.45%

19.45%
 Coupon Rate 0%

Forward Rate FV 1000

(1+fn)=(1+yn )n)/(1+yn-1)n+1
year bond/ price 5 year bond= how many times bond 5 is neet

sitve cashflow
egative cashflow
Duration- measure of price sensativity 12
Effects:
Coupon Rate
Time to maturity
E
13 D
 Semi Annual bond
Coupon Rate 4.40%
Years 3
A) YTM 8.00%

B) YTM 7.0%
FV 100

8 Years

8 Year duration Graph

Time Cashflow PV of CF dscounted 3% Weight
1 $ 2.20 $ 2.115 0.023358
2 $ 2.20 $ 2.034 0.022459
3 $ 2.20 $ 1.956 0.021596
 4 $ 2.20 $ 1.881 0.020765
5 $ 2.20 $ 1.808 0.019966
6 $ 102.20 $ 80.770 0.891856
Sums $ 90.564 1

Duration for half years $ 5.66709

A) Duration 8% YTM $ 2.8335

Duration Time Cashflow PV of CF dscounted 5%
$ 0.02336 1 $ 2.20 $ 2.13
$ 0.04492 2 $ 2.20 $ 2.05
$ 0.06479 3 $ 2.20 $ 1.98
$ 0.08306 4 $ 2.20 $ 1.92
$ 0.09983 5 $ 2.20 $ 1.85
$ 5.35113 6 $ 102.20 $ 83.14
$ 5.66709 Sums $ 93.07

Duration of Half years 5.672489

B) Duration 10% YTM 2.8362

 FV 100

Weight Duration
0.022838 0.022838
0.022066 0.044132
0.02132 0.063959
0.020599 0.082394
0.019902 0.09951
0.893276 5.359656
1 5.672489
 2 Year duration Graph 6% Yield $92
Coupon Payment $ 9,600.00 Time Until Payment (Years) Cashflow
FV $ - 1 $ 9,600.00
Time 2 2 $ 9,600.00
YTM 8% Sums
PV $17,119.34

A) PV $ 17,119.34
Duration 1.4808
B) A zero coupon bond maturing in 1.4808

Duration 1.4808
FV $19,185.80

C) Bond increase/decrease 10%

PV of bond $16,660.46
PV of tuition $ 16,661.16
Net Position decrease

D) Bond increase/decrease 7%
PV bond $17,356.79
PV of tuition $17,356.97
Net Position decrease
ration Graph 6% Yield $9200 PMT
Discout CF at 8% Weight Duration
$ 8,888.89 0.51923077 0.519231
$ 8,230.45 0.48076923 0.961538
$ 17,119.34 1 1.480769
years immunizes obligation

in value by $ 0.70

in value by $0.19
Year 30 YTM
Coupon Rate 8.50% 10.60%
Duration 18.23 11.60%
Convexity 199.2 12.60%
YTM 11.60%
FV 1000

aaa
$811.53 A) YTM of 10.4% $811.53
$742.69 YTM of 12.4% $683.86
$683.86
B) Maturity Falls 10.4%
Duration Rule
Predicted Price Change $121.32
Predicted New Price $864.01

Duration-with-convexity Rule
Predicted Price Change $128.72
Predicted New Price $871.41

Maturity Raises 12.4%

Duration Rule
Predicted Price Change $121.32
Predicted New Price $621.37

Duration-with-convexity Rule
Predicted Price Change -$113.92
Predicted New Price $628.77
Duration Rule Duration- with-
Convexity Rule
YTM Falls to 10.4% $864.01 $871.41
YTM Increases to 12.4% $621.37 $628.77

Duration-with-
c) Duration Rule convexity Rule
Percent Error for 10.4% YTM 6.47% 7.38%
Percent Error for 12.4% YTM -9.14% -8.06%

d) The duaration-with-convexity rule provides more accurate approximations to the true chan
in price.
 error 6.47%

error 7.378%

error -9.137%

error -8.056%

proximations to the true change