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Assignment 1 Fixed Income

This document provides instructions for Assignment 1. Students must complete the assignment neatly with name, roll number, and signature on each page. They must scan and upload the assignment by February 4th before midnight. The assignment contains two parts with calculation questions. Part 1 includes questions about bond valuation, yields, and arbitrage opportunities. Part 2 covers topics like floating rate securities, Treasury bills, yield spreads, and portfolio duration. Students are instructed to show work for all questions.

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Sidra Jamshaid Ch
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372 views3 pages

Assignment 1 Fixed Income

This document provides instructions for Assignment 1. Students must complete the assignment neatly with name, roll number, and signature on each page. They must scan and upload the assignment by February 4th before midnight. The assignment contains two parts with calculation questions. Part 1 includes questions about bond valuation, yields, and arbitrage opportunities. Part 2 covers topics like floating rate securities, Treasury bills, yield spreads, and portfolio duration. Students are instructed to show work for all questions.

Uploaded by

Sidra Jamshaid Ch
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Assignment 1

Instructions:

I. Neat and clean HANDWRITTEN assignment.


II. Write your NAME, ROLL NUMBER and SIGNATURE on EVERY PAGE of the assignment.
III. SCAN it or take a picture, edit/ remove the area other than the paper and UPLOAD as
attachment in the Assignment.
IV. Late submission or missing names, roll numbers and signatures will result in heavy MARKS
PLENTY.
V. Submission Date and Time: Thursday February 04, 2021 before 12:00 AM in the night.
VI. Good Luck!

Part 1

1. AKD Securities has invested in municipal bonds that offer a yield of 8%. IGI Investments has
invested in corporate bonds offering a yield of 12%. If the marginal tax rate is 40%, which
investment company has made better investment?

2. Solve the following.


a. What is the value of a 5-year 5.8% annual coupon bond if the appropriate discount rate is 7.3%?
b. You are planning to purchase the above coupon paying bond, strip it into a package of zero
securities and sell them in the discount bonds market. Evaluate the package of synthetic zero
securities and tell what you should do to earn arbitrage profit? Appropriate rate for discounting
each cash flow is as follows:

Year Discount Rate

1 5.90%

2 6.40%

3 6.60%

4 6.90%

5 7.30%

3. What is the value of a 5-year 7.4% coupon bond selling to yield 5.6% assuming the coupon
payments are made semiannually?

4. What is the value of a zero coupon bond that matures in 20 years, has a maturity of $1 million,
and is selling to yield 7.6%?
5. Suppose that a bond is purchased between coupon periods. The days between the settlement
date and the next coupon period is 115. There are 183 days in the coupon period. Suppose that
the bond purchased has a coupon rate of 7.4% and there are 10 semiannual coupon payments
remaining.
a. What is the dirty price of this bond if a 5.6% discount rate is used?
b. What is the accrued interest for this bond?
c. What is the clean price?

6. Suppose that a 10% 15-year semiannual bond has the following call structure:

not callable for the next 5 years


first callable in 5 years at $105
first par call date is in 10 years
The price of the bond is $127

You are required to populate the data into bond valuation formula for the following: [No calculation
required]
a. Yield-to-maturity
b. Yield-to-call
c. Yield-to-first-par-call

Part 2

7. Which one of the following two 6-year $100 par floating rate securities would you invest in?
a. Floater A has a spread for life of 180 basis points
b. Floater B has 6 years to maturity and a coupon rate set at 1-Year LIBOR + 70 basis
points. It is currently trading at a price of $93.
 
8. A Treasury bill with 105 days from settlement to maturity is selling for $0.989 per $1 of maturity
value. What is the yield on a discount basis?

9. A Treasury bill with 275 days from settlement to maturity is quoted as having a yield on a
discount basis of 3.68%. What is the price of this Treasury bill?

10. For the bonds of Dell and IBM, calculate the following:
a. Absolute Yield Spread
b. Relative Yield Spread
c. Yield Ratio
Following data on the bonds is available below:

Bond Market Yield

5-year T-Bond 5%
10-Year T-Bond 10%

5-Year bond of Dell 7%

10-Year bond of 12%


IBM

Which bond is offering better yield?

11. Consider a $100 par, 9% coupon, 20-year, option-free bond selling at $134.67 to yield 6%. Giving
a rate shock of 20 basis points, we get prices of $137.59 and $131.84 for decrease and increase
in yield respectively. For an increase of 135 basis points in yield, calculate the following:

a.       Percentage Price Change using Duration


b.      Convexity Adjustment needed
c.       Total Percentage Price Change
d.      New Price of bond

12. United Investment Co. has a 4-bond portfolio. All bonds have equal weight in portfolio
investment. The duration of bonds are 4, 5, 6 and 10. Calculate the duration of the portfolio.

[End of Assignment no. 1]

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