Consider a 4-year 10% coupon bond with nominal capital 100. You can 'strip off the coupon...

 

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Consider a 4-year 10% coupon bond with nominal capital 100. You can 'strip off the coupon payments - the first due in exactly one year, the second in two years, the third in three years and the final in three years - and sell them separately for 9.4, 8.7, 7.9 and 7.3, respectively. If you are offered an opportunity to borrow $100 at the end of year 1 with repayment of $119 at the end of year 4. What is the maximum price you are willing to pay for such opportunity today? (28 marks) Q1(b) Bond A is a 5-year bond paying annual coupon of 5% per year with face value of 100. If the term structure is flat at 4%. What is the duration and convexity of such bond? Approximate the relative price change if yield is to increase by 0.5 % (36 marks) Q1(c) A company needs to make pension payment of $2m each year for 5 years with first payment 5 years from now (i.e. $2m at the end of year 5, 6, 7, 8 and 9). It intends to fund its pension liabilities by investing in 5 years and 10 years zero coupon bond. What are the amounts to be invested in each bond such that its position is immunised against small change in interest rate? Assume the term structure is flat at 5% per annum. (36 marks) Consider a 4-year 10% coupon bond with nominal capital 100. You can 'strip off the coupon payments - the first due in exactly one year, the second in two years, the third in three years and the final in three years - and sell them separately for 9.4, 8.7, 7.9 and 7.3, respectively. If you are offered an opportunity to borrow $100 at the end of year 1 with repayment of $119 at the end of year 4. What is the maximum price you are willing to pay for such opportunity today? (28 marks) Q1(b) Bond A is a 5-year bond paying annual coupon of 5% per year with face value of 100. If the term structure is flat at 4%. What is the duration and convexity of such bond? Approximate the relative price change if yield is to increase by 0.5 % (36 marks) Q1(c) A company needs to make pension payment of $2m each year for 5 years with first payment 5 years from now (i.e. $2m at the end of year 5, 6, 7, 8 and 9). It intends to fund its pension liabilities by investing in 5 years and 10 years zero coupon bond. What are the amounts to be invested in each bond such that its position is immunised against small change in interest rate? Assume the term structure is flat at 5% per annum. (36 marks) Consider a 4-year 10% coupon bond with nominal capital 100. You can 'strip off the coupon payments - the first due in exactly one year, the second in two years, the third in three years and the final in three years - and sell them separately for 9.4, 8.7, 7.9 and 7.3, respectively. If you are offered an opportunity to borrow $100 at the end of year 1 with repayment of $119 at the end of year 4. What is the maximum price you are willing to pay for such opportunity today? (28 marks) Q1(b) Bond A is a 5-year bond paying annual coupon of 5% per year with face value of 100. If the term structure is flat at 4%. What is the duration and convexity of such bond? Approximate the relative price change if yield is to increase by 0.5 % (36 marks) Q1(c) A company needs to make pension payment of $2m each year for 5 years with first payment 5 years from now (i.e. $2m at the end of year 5, 6, 7, 8 and 9). It intends to fund its pension liabilities by investing in 5 years and 10 years zero coupon bond. What are the amounts to be invested in each bond such that its position is immunised against small change in interest rate? Assume the term structure is flat at 5% per annum. (36 marks) Consider a 4-year 10% coupon bond with nominal capital 100. You can 'strip off the coupon payments - the first due in exactly one year, the second in two years, the third in three years and the final in three years - and sell them separately for 9.4, 8.7, 7.9 and 7.3, respectively. If you are offered an opportunity to borrow $100 at the end of year 1 with repayment of $119 at the end of year 4. What is the maximum price you are willing to pay for such opportunity today? (28 marks) Q1(b) Bond A is a 5-year bond paying annual coupon of 5% per year with face value of 100. If the term structure is flat at 4%. What is the duration and convexity of such bond? Approximate the relative price change if yield is to increase by 0.5 % (36 marks) Q1(c) A company needs to make pension payment of $2m each year for 5 years with first payment 5 years from now (i.e. $2m at the end of year 5, 6, 7, 8 and 9). It intends to fund its pension liabilities by investing in 5 years and 10 years zero coupon bond. What are the amounts to be invested in each bond such that its position is immunised against small change in interest rate? Assume the term structure is flat at 5% per annum. (36 marks)

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