1. Patsy Dougherty bought a $1,000-face-value bond with a 9% coupon rate. The bond has three years to maturity, pays interest annually, and makes its first interest payment one year from today. Patsy bought the bond for $975.13.

(a) What is the bond's yield-to-maturity?

(b) If Patsy is able to invest the bond's cash flows at only 7%, what is Patsy's actual annual compounded return on the bond investment, assuming that it is held to maturity? (Hint: think in terms of the cash flows paid to Patsy, the bond's purchase price, and the term of the investment.)

Finance 312 Tutorial 2 stu Th 4 is 2 5 SPOT RATE 5.0% 5.5 6.5 ur YEAR 3 c e ou d e w rs vi as eH a er o. co dy 1. Consider two bonds, each with a $1,000 face value and each with three years remaining to maturity. a) The first bond is a pure-discount bond that currently sells for $816,30. What is the yieldto-maturity? b) The second bond currently sells $949,37 and makes annual coupon payments at a rate of 7% (that is, it pays $70 in interest per year). The first interest payment is due one year from today. What is this bond's yield-to-maturity? 2. Camp Douglas Dirigibles has a bond outstanding with four years to maturity, a face value of $1,000 and a annual coupon payment of $100. What is the price of Camp Douglas bond if its yield-to-maturity is 12%? If its yield-to-maturity is 8%? 3. The concept of yield-to-maturity is based on two crucial assumptions. What are those assumptions? What will happen to the bondholder's return if those assumptions are violated? 4. Patsy Dougherty bought a $1,000-face-value bond with a 9% coupon rate. The bond has three years to maturity, pays interest annually, and makes its first interest payment one year from today. Patsy bought the bond for $975.13. (a) What is the bond's yield-to-maturity? (b) If Patsy is able to invest the bond's cash flows at only 7%, what is Patsy's actual annual compounded return on the bond investment, assuming that it is held to maturity? (Hint: think in terms of the cash flows paid to Patsy, the bond's purchase price, and the term of the investment.) 5. Distinguish between spot and forward rates. 6. Given the following spot rates for various of times from today, calculate the forward rates from years one to two, two to three, and three to four. FORWARD TIME PERIOD f f f f 1,2 2,3 3,4 sh re 0,1 FORWARD RATE 10% 9.5 9.0 8.5 ar so 7.0 7. Given the following forward rates, calculate the one-,two-,three-,and four-year spot rates. 8. Assume that the current one-year spot rate is 8% and that the forward rates for one year https://www.coursehero.com/file/9524605/Tut-2-2014/ hence and two years hence, are, respectively, f 1,2 = 9% f 2,3 = 10% What should the market price of an 8% coupon bond, with a $1,000 face value, maturing three years from today? The first interest payment is due one year from today. Interest is payable annually. 9. Is it true that observed downward-sloping yield curve is inconsistent with the liquidity preference theory of the term structure of interest rates? Explain Finance 312 Tutorial 4 1. Mr Geoffrey Geddes is the financial director of Geddes Ltd. Geddes Ltd is a manufacturing company which has just sold one of its subsidiaries for R25 million in cash. These funds will be used for the development of a new project in a few months, but in the mean time Mr Geddes is considering investing the money in the bond market. He has obtained the following information: TERM-TOMATURITY COUPON YIELD-TO- CURRENT DURATION CONVEXITY RATE MATURITY PRICE A 3 0% 10% 751.32 3 9.92 B 3 9% Not required ? 2.75 8.72 C 5 12% 10% ? ? 18.74 D 5 10% 10% 1 000.00 4.17 19.37 E 6 25.03% 10% 1 654.60 4.17 20.82 The current one-year spot rate is 18.6%, and the current two-year spot rate is 14.87%. stu c e ou d e w rs vi as eH a er o. co dy BOND sh ar so Calculate the current price of bond B. Calculate the current price of bond C. Calculate the duration of bond C. Calculate the expected price of bond C if its yield-to-maturity decreases by 2% using (i) the duration rule (ii) the duration-with-convexity rule. (e) Discuss the concepts of duration and convexity and explain how each fits into the price/yield relationship. Illustrate your answer with appropriate diagrams. In addition to the information in the table above, you can assume that at a yield-to-maturity of 8% the actual prices of the bonds described in the table are as follows: re (a) (b) (c) (d) ur Th REQUIRED: is Assume that interest payments, where applicable are made on an annual basis. The first interest payment is due one year from today. All bonds have a face value of R1 000. All bonds, except B, are in the same risk category. https://www.coursehero.com/file/9524605/Tut-2-2014/ BOND A B C D E 2. PRICE AT 8% YTM 793.83 1025.77 1159.71 1079.85 1787.28 Chapter 11. Problems 7, CFA 3, 24, 27 ur sh ar so re Th is stu c e ou d e w rs vi as eH a er o. co dy 1 https://www.coursehero.com/file/9524605/Tut-2-2014/ Powered by TCPDF (www.tcpdf.org)