Consider the following information on three government bonds: Bonds Issue date Settlement date Maturity Redemption value...
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Consider the following information on three government bonds: Bonds Issue date Settlement date Maturity Redemption value Coupon rate No. of coupons p.a. Yield to maturity Basis X 30/06/2008 30/07/2011 30/06/2012 £100 2.50% 2 4.50% 0 Y 30/06/2007 30/06/2011 30/06/2013 £100 0.00% 2 5.50% 0 Z 30/06/2006 30/09/2011 30/06/2012 £100 5.00% 2 6.50% 0 (a) Calculate the clean and dirty prices for each of the above 3 bonds (use Excel functions to answer this question). [20% ] (b) Calculate the current yields of the 3 bonds. How do they compare with the adjusted coupon yields? Using Bond X as an example, plot the 2 yields across a range of prices. What do you observe? [20%] (c) Using a data table, show the sensitivity of Bond Z's prices to changes in yield across a range of settlement dates. Comment on your results. [20% ] (d) Using Bond X as an example, show the effect on its duration when the bond's maturity increases. Plot the result. What happens to duration as the number of years increases? [20%] (e) Assuming that you can lock in at the spot interest rate of 4.85% as at 30/06/2011 for a one-year investment horizon, what would be the implied forward rate based on the two-year zero-coupon Bond Y? What do the results suggest about the shape of the term structure? Explain your answer. [20%] Consider the following information on three government bonds: Bonds Issue date Settlement date Maturity Redemption value Coupon rate No. of coupons p.a. Yield to maturity Basis X 30/06/2008 30/07/2011 30/06/2012 £100 2.50% 2 4.50% 0 Y 30/06/2007 30/06/2011 30/06/2013 £100 0.00% 2 5.50% 0 Z 30/06/2006 30/09/2011 30/06/2012 £100 5.00% 2 6.50% 0 (a) Calculate the clean and dirty prices for each of the above 3 bonds (use Excel functions to answer this question). [20% ] (b) Calculate the current yields of the 3 bonds. How do they compare with the adjusted coupon yields? Using Bond X as an example, plot the 2 yields across a range of prices. What do you observe? [20%] (c) Using a data table, show the sensitivity of Bond Z's prices to changes in yield across a range of settlement dates. Comment on your results. [20% ] (d) Using Bond X as an example, show the effect on its duration when the bond's maturity increases. Plot the result. What happens to duration as the number of years increases? [20%] (e) Assuming that you can lock in at the spot interest rate of 4.85% as at 30/06/2011 for a one-year investment horizon, what would be the implied forward rate based on the two-year zero-coupon Bond Y? What do the results suggest about the shape of the term structure? Explain your answer. [20%]
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SOLUTION a Clean and dirty prices PRICEsettlementmaturitycouponyieldfrequencybasis Bond X Clean pric... View the full answer
Related Book For
Corporate Finance Core Principles and Applications
ISBN: 978-0077905200
3rd edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford
Posted Date:
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