Question

3. Suppose a bond’s price is expected to decrease by 5% if its market discount rate increases by 100 bps. If the bond’s market discount rate decreases by 100 bps, the bond price is most likely to increase by:

a) 5%

b) Less than 5%

c) More than 5%

d) none of the above.

4. An investor is considering the purchase of a 2-year bond with a 5% coupon rate, with interest paid annually. Assuming the following sequence of spot rate: 1 year, 3% and 2 year, 4%, the yield to maturity of the bond is:

a) 3.98%

b) 3.50%

c) 2.89%

d) none of the above.

12. Given the following government bond yields: one-year, 2% and five-year, 7%. What is the twoyear government bond yield one would linearly interpolate from this information?

a) 3.25%

b) 4.50%

c) 3.67%

d) none of the above.

13. A bond with 20 years remaining until maturity is currently trading at 111 per 100 of par value. The bond offers a 5% coupon rate with interest paid semiannually. The bond’s annual yield-tomaturity is closest to:

a) 2.09%

b) 4.18%

c) 4.50%

d) none of the above.

14. A 365-day year bank certificate of deposit has an initial principal amount of USD 96.5 million and a redemption amount due at maturity of USD 100 million. The number of days between settlement and maturity is 350. The bond equivalent yield is closest to:

a) 3.48%

b) 3.65%

c) 3.78%

d) none of the above.

Answer 1

3)	More then 5% , due to convexity of bond increase in bond price is more then decrease in bond price.
4)	YTM^2 =	1.03 x 1.04
	YTM =	Sq root(1.0712)
	YTM =	1.034988
	YTM =	3.50%
12)	Annual Increase in yield =			(7-2)/3
				1.666667
	Year 2 Yield =		2 + 1.67 =	3.666667
13)	YTM is the rate at which pv of cashflows are = price of bond
	Price =	Coupon x PVAF(r,n) + Par x PVIF(r,n)
	111 =	2.5 x PVAF(r,40) + 100 x PVIF(r,40)
	r		Price
	2%		113.6777
	r		111
	2.5%		100
	Using linear interpolation -
	r-2/2.5-2 =		111-113.677/100-113.677
	r-2/0.5 =		-2.677/-13.677
	r-2/0.5 =		0.20
	r =		2.10
	Semi annual rate =		2.10
	Annual rate =		4.195774
			(b)
14)	Discount on CD		(100-96.5)	3.5
	Rate of return on CD		3.5/96.5 x 100	3.627%
	BEY	3.627 x 365/350 =		3.78%