Exercises going with Introduction to Fixed Income Instruments

Michael Rockinger

Problem 1. Consider a bond with semi-annual constant coupon payments. This bond has a nominal value of
50EUR. The annualized coupon rate is 2.14%. The last coupon payment was 73 days ago (here assume that a year
has 360 days). This bond has a residual time of 5.5 years plus 107 days. This bond is quoted at 115.44%.
Question 1. Determine the actual price of this bond. That is the price you would have to pay if you were to
purchase this bond.
Question 2. Determine the yield to maturity of this bond.
Question 3. Assume that the yield to maturity of comparable bonds in the market is -1.20 %. Indicate how you
could take advantage of such a situation. We assume that shorting bonds can be done without any cost.

Problem 2. We consider the following term structure of spot (continuous compounded) interest rates for various
maturities Ti :

i 1 2 3 4 5
Ti 0.5 1 1.5 2 2.5
r(0, Ti ) 2.7605 2.7141 2.7471 2.8125 2.8884

Question 1. Determine the discount factors corresponding to the various time horizons.
Question 2. Obtain the annualized quarterly-compounded (4-compounded) interest rates.
Question 3. A bond with maturity in 2.5 years pays semi-annual coupons with a coupon rate of c. Determine the
coupon rate such that this bond quotes at par today.
Question 4. If the annual coupon rate of such a bond is 3.14%, determine the price of the bond given that its
nominal value is 100.
Question 5. Determine the yield to maturity of this bond.