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INV3702 ECP ASSIGNMENT 1 2021
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CONTAINS SOLUTIONS FOR THE ECP ASSIGNMENT 1 2021 OF INV3702. USEFUL FOR REVISIONS
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INV3702 ECP ASSIGNMENT 12021
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Question 1
Consider a R1 million semi-annual pay floating-rate issue, where the rate is reset on 1
January and 1 July each year. The reference rate is 6-month LIBOR and the stated margin
+1.25%. If 6-month LIBOR is 6.5% on 1 July, what will the next semi-annual coupon on this
issue be?
[1] R38 750
[2] R65 000
[3] R77 500
Workings
Annual coupon rate = LIBOR + Quoted margin
Annual coupon = 6.5% + 1.25 = 7.75%
0.0775
The next semi-annual coupon = x 1 000 000 = R38 750
2
Question 2
Which of the following statements is most accurate regarding floating-rate issues that have
caps and floors?
[1] A floor is an advantage to the bondholder, while a cap is an advantage to the issuer.
[2] A cap is an advantage to the bondholder, while a floor is an advantage to the issuer.
[3] A floor is an advantage to the issuer and the bondholder, while a cap is a disadvantage to
the issuer and the bondholder.
A floor on a floating issue sets out the minimum possible rate that the issue will pay even if
rates fall below that and that benefits the bondholder.
A cap sets the maximum rate which a floating rate issue will not go beyond, it protects the
issuer when rates are increasing.
Question 3
A bond manager considers buying a five-year semi-annual bond, with R1 000.00 par value,
12% coupon rate and is currently trading at R937.00. Which one of the following is closest to
the yield of this bond?
[1] 13.79%
[2] 13.95%
[3] 14.16%
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