INV3702 Assignment
2 (COMPLETE
ANSWERS) Semester 2
2024 - DUE September
2024 ; 100% TRUSTED
Complete, trusted
solutions and
explanations.
ADMIN
[COMPANY NAME]
,INV3702 Assignment 2 (COMPLETE ANSWERS) Semester
2 2024 - DUE September 2024 ; 100% TRUSTED Complete,
trusted solutions and explanations.
Question 1 You observe the following sovereign bonds. Time to
maturity Coupon Yield to maturity Bond A 1 year 6% 2.342%
Bond B 1 year 0% 2.350% Bond C 2 years 6% 2.496% Bond D
2 years 0% 2.500% Bond E 3 years 6% 2.711% Bond F 3 years
0% 2.725% Determine whether Bond C is overvalued,
undervalued or fairly valued. All coupons are paid annually. (3)
To determine whether Bond C is overvalued, undervalued, or
fairly valued, we need to compare its price with its theoretical
price based on the yield to maturity (YTM) of similar bonds.
Bond C Details
• Time to Maturity: 2 years
• Coupon Rate: 6%
• Yield to Maturity (YTM): 2.496%
Theoretical Price Calculation
To assess the value of Bond C, we first calculate its theoretical
price using its YTM and compare it with the market price of
Bond C.
Bond Price Calculation Formula:
Price=C(1+r)1+C+F(1+r)2\text{Price} = \frac{C}{(1 + r)^1} +
\frac{C + F}{(1 + r)^2}Price=(1+r)1C+(1+r)2C+F
Where:
, • CCC = Annual coupon payment
• rrr = Yield to maturity (YTM)
• FFF = Face value (typically 100, assuming standard bond
face value)
For Bond C:
• Coupon Payment C=6%×100=6C = 6\% \times 100 =
6C=6%×100=6
• Face Value F=100F = 100F=100
• YTM r=2.496%r = 2.496\%r=2.496% or
0.024960.024960.02496
Calculations:
1. First Coupon Payment:
6(1+0.02496)1=61.02496≈5.855\frac{6}{(1 + 0.02496)^1}
= \frac{6}{1.02496} \approx 5.855(1+0.02496)16
=1.024966≈5.855
2. Second Coupon Payment + Face Value:
6+100(1+0.02496)2=1061.05037≈100.88\frac{6 + 100}{(1
+ 0.02496)^2} = \frac{106}{1.05037} \approx
100.88(1+0.02496)26+100=1.05037106≈100.88
3. Total Price of Bond C:
Price=5.855+100.88≈106.735\text{Price} = 5.855 + 100.88
\approx 106.735Price=5.855+100.88≈106.735
Comparison with Market Prices
To determine if Bond C is overvalued or undervalued, compare
its theoretical price to its current market price. Unfortunately,
the market price of Bond C is not provided, so we compare its
YTM with other bonds of similar maturity.
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