Full-Time End-of-Module Assessment 2021/2022 (Semester 3) Module Code/Title: FIN4205/Investment Analytics I Programme Code/Year: BA114048/1 Question 3 As Suppose all investors expect that the interest rates for the next 4 years will be as follows: Year Short Rate Yield to Maturity 1 4.50% 4.50% 5.00% 4.75% 5.50% 5.00% 6.00% ??? 23 4 a) Calculate the yield to maturity in the fourth year. (2 marks) b) Suppose Bond X is a 4-year maturity bond with a par value of $1,000 that makes annual coupon payments at a coupon rate of 8%. If you buy Bond X today, what is your purchase price for this bond? (3 marks) c) Based on your answer in part (b), calculate the current yield for Bond X. (2 marks) d) Suppose you purchased Bond X, a 4-year bond, at the price calculated at b) and held it for 2 years. The bond's yield to maturity was 6% when it is sold by the end of year 2 and the reinvestment rate on the coupon was 6%. What is your realized compound yield generated (9 marks) from the investment at Bond X? e) Explain the conceptual improvement of realized compound yield over current yield in measuring returns to investors. (4 marks) (Total 20 marks) Full-Time End-of-Module Assessment 2021/2022 (Semester 3) Module Code/Title: FIN4205/Investment Analytics I Programme Code/Year: BA114048/1 Question 3 As Suppose all investors expect that the interest rates for the next 4 years will be as follows: Year Short Rate Yield to Maturity 1 4.50% 4.50% 5.00% 4.75% 5.50% 5.00% 6.00% ??? 23 4 a) Calculate the yield to maturity in the fourth year. (2 marks) b) Suppose Bond X is a 4-year maturity bond with a par value of $1,000 that makes annual coupon payments at a coupon rate of 8%. If you buy Bond X today, what is your purchase price for this bond? (3 marks) c) Based on your answer in part (b), calculate the current yield for Bond X. (2 marks) d) Suppose you purchased Bond X, a 4-year bond, at the price calculated at b) and held it for 2 years. The bond's yield to maturity was 6% when it is sold by the end of year 2 and the reinvestment rate on the coupon was 6%. What is your realized compound yield generated (9 marks) from the investment at Bond X? e) Explain the conceptual improvement of realized compound yield over current yield in measuring returns to investors. (4 marks) (Total 20 marks)