ECN226 Capital Markets 1 – 2011 Past Paper Questions and Answers
17 views 0 purchase
Course
ECN226 Capital Markets 1 (ECN226)
Institution
Queen Mary, University Of London (QMUL)
High-quality past paper questions and answers for the ECN226 Capital Markets 1 module for the Queen Mary University of London (QMUL) Economics Course. Each question is reproduced and high-quality full-mark scores are written up clearly for each one. Great for preparing for exams, studying and solid...
FOR MORE HIGH-QUALITY PAST PAPER MODEL ANSWERS, ONLINE TUTORING AND
ECONOMICS HELP, visit LondonEconomicsTutors.co.uk.
Discounted prices compared to all other websites
ECN226 Capital Markets 1 – 2011
Questions and Answers
Question 1
a) Note that there is an error in the question. The value of a bond is equal to the present discounted
value of all of its coupon payment (CP) plus the discounted value of its Face value (F) payed at the
end of the bonds life. We assume that the bond pays 1 coupon per year for T years.
The present value of the bond is then:
𝐶𝑃 𝐶𝑃 𝐶𝑃 𝐹
𝑃𝑉 = + + ...+ +
1+𝑟 (1 + 𝑟) (1 + 𝑟) (1 + 𝑟)
1 1 1 𝐹
𝑃𝑉 = 𝐶𝑃[ + + ...+ ] +
1+𝑟 (1 + 𝑟) (1 + 𝑟) (1 + 𝑟)
To further simplify the present value formula, we first add ( )
+ ( )
+ . .. and take away
the same numbers. Then, the present value can be expressed as follows:
1 1 1 1 1 1
𝑃𝑉 = 𝐶𝑃[ + + ...+ + + +. . . −
1+𝑟 (1 + 𝑟) (1 + 𝑟) (1 + 𝑟) (1 + 𝑟) (1 + 𝑟)
1 𝐹
− − ...] +
(1 + 𝑟) (1 + 𝑟)
, FOR MORE HIGH-QUALITY PAST PAPER MODEL ANSWERS, ONLINE TUTORING AND
ECONOMICS HELP, visit LondonEconomicsTutors.co.uk.
Discounted prices compared to all other websites
b) Here, bond A would have a lower volatility as compared to bond B. The relationship between
bond price volatility and the coupon rate is an inverse one – the higher the coupon rate, the less
volatile the bond price is to interest rate change, and vice versa. Bonds with higher coupon rates pay
higher coupon payments, allowing investors to be paid back their initial investment costs sooner in
terms of time value of money, and thus subjecting bond prices to interest rate change to a lesser
degree. This is because a higher coupon payment results in the bond having a shorter duration, and
in general, bonds with a long duration have a higher price fluctuation than bonds with a short
duration.
c) Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it
matures. Yield to maturity is considered a long-term bond yield but it is expressed as an annual rate.
Bond D will have a higher yield to maturity as compared to Bond C. This is because there is an
inverse relationship between market price of the bond and its yield. The higher the market price, the
lower the return and the lower the market price the higher the return in bond. To see this
mathematically, consider the equation below, which relates the given price of a bond (P) with the
return expected by investors (y):
1 1 𝐹
𝑃 = 𝐶𝑃[ − ] +
𝑦 𝑦(1 + 𝑦) (1 + 𝑦)
It can be shown that as y increases, P decreases, which demonstrates the inverse relationship
between price and the yield to maturity.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller londoneconomicstutors. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $5.15. You're not tied to anything after your purchase.
