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INV3702 ASSIGNMENT 2 2024|-2025QUESTIONS AND CORRECT ANSWERS 100% PASS
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INV3702 ASSIGNMENT 2 2024|QUESTIONS AND CORRECT ANSWERS 100% PASSQUESTION 1 Determine whether Bond E is overvalued, undervalued or fairly valued. All coupons are paid annually. The price of the 3-year coupon bond (as a percent of par) is: N = 3; I/YR = 2.711; PMT = 5; FV = 100; Compute PV =...

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  • February 18, 2024
  • 8
  • 2024/2025
  • Exam (elaborations)
  • Questions & answers

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  • inv3702
  • 2025
  • inv3702 assignment 2 2024questions and correct a
  • question 1 determine whether bond e is overvalued

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INV3702 ASSIGNMENT 2
2024|QUESTIONS AND
CORRECT ANSWERS
100% PASS
QUESTION 1
Determine whether
Bond E is overvalued,
undervalued or fairly
valued. All coupons
are paid annually.

, The price of the 3-year coupon bond (as a percent of par) is:

N = 3; I/YR = 2.711; PMT = 5; FV = 100;

Compute PV = –106.51



The no-arbitrage price of the 3-year coupon bond based on spot (zero-coupon) rates is:
5 5 105
+ + = 106.51
1.02350 (1.02500)2 1.027253




Therefore the 3-year coupon bond's price equals its no-arbitrage value, therefore the bond
is fairly valued.




QUESTION 2

Explain to Kgomotso why her method leads to an incorrect answer, and advise her on the
correct method to approach this question. No calculations are necessary.

Kgomotso’s method uses the yield-to-maturity as the input for I/YR.

Yield-to-maturity is not appropriate for arbitrage-free valuation when the yield curve is not
flat.

She should value each cash flow separately using the corresponding spot rate.
5
105
Full marks for the correct equation: +
1.035 1.03652

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