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INV3702 Assignment 2 Semester 1 & 2 (Both) 2021
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INV3702 ASSIGNMENT 02 SEMEMSTER 1 & 2 2021Work through lessons 1 to 7; then answer the following questions. Submit your assignment via
myUnisa.
Question 1
You observe the following sovereign bonds.
Time to maturity Coupon Yield to maturity
Bond A 1 year 5% 2.342%
Bond B 1 year 0% 2.350%
Bond C 2 years 5% 2.496%
Bond D 2 years 0% 2.500%
Bond E 3 years 5% 2.711%
Bond F 3 years 0% 2.725%
Determine whether Bond E is overvalued, undervalued or fairly valued. All coupons are paid
annually. (3)
The price of the 3-year coupon bond (as a percent of par) is:
N = 3; I/Y = 2.711; PMT = 5; FV = 100; CPT PV = −106.51
The no-arbitrage price of the 3-year coupon bond based on spot (zero-coupon) rates is:
.02350 + 5 / (1.02500)^2 + 105 / (1.02725)^3 = 106.51
Because the 3-year coupon bond's price equals its no-arbitrage value, the bond is fairly valued.
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