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INV3702 Assignment 1 2022
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Contains solutions for assignment 1 of INV3702 semester 1 of 2022. Calculations have been included for revision purposes.
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INV3702 ASSIGNMENT 1 2022, 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
The Coupon rate = 6.5% + 1.25% = 7.75%
Annual coupon = 7.75% x 1 000 000 = R77 500
Since it is semi-annual (6 months) = 77 500 x 0.5 = R38 750
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.
Explanation
A floor will ensure that rates will not go below that and caps will ensure that rates will
not go above that.
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%
Workings
FV = 1 000
PMT = 60 (1 000 x 0.12 = 120/2)
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