INV3702 Assignment 2 (COMPLETE ANSWERS) Semester 2 2024 - DUE September 2024 ; 100% TRUSTED Complete, trusted solutions and explanations. For assistance, Whats-App 0.6.7-1.7.1-1.7.3.9. Ensure your success with us... Question 1
You observe the following sovereign bonds.
Time to maturity Coupon Yi...
The price of the 2-year coupon bond (as a percentage of its par value) is calculated as follows:
• N = 2 years
• I/YR = 2.496%
• PMT = 6
• FV = 100
The present value (PV) is computed to be 106.7541.
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QUESTION 1
The price of the 2-year coupon bond (as a percentage of its par value) is calculated
as follows:
• N = 2 years
• I/YR = 2.496%
• PMT = 6
• FV = 100
The present value (PV) is computed to be 106.7541.
The no-arbitrage price of the 2-year coupon bond based on spot (zero-coupon) rates
is:
6 106
+ = 106.7546
1.02350 1.025002
The 2-year coupon bond's price equals its no-arbitrage value, therefore the bond is
fairly valued.
QUESTION 2
The trader should buy Bond B.
Reasoning:
• Bond B has a current yield to maturity of 8.5%, which is higher than the
average yield of similar bonds at 8.0%.
• If the trader expects bond yields to return to the yield of the peer group (8.0%),
the price of Bond B will increase as the yield declines to match the average
yield.
• Bonds with a higher yield than their peers are generally underpriced, and as
the yield decreases to the peer level, the bond price will rise, allowing the trader
to profit from this price increase.
Disclaimer
Extreme care has been used to create this document, however the contents are provided “as is” without
any representations or warranties, express or implied. The author assumes no liability as a result of
reliance and use of the contents of this document. This document is to be used for comparison, research
and reference purposes ONLY. No part of this document may be reproduced, resold or transmitted in any
form or by any means.
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