#1? Explain the calculations in each of the three panels below, one at a time. Explain the purpose of the calculation and the procedure of the calculation, i.e., how the data inputs determine the output ? the result. Bond Questions Support Sheets.xlsx (posted on Bb assignment page) has ?live? sheets so you can see how the calculations work.

buy at par		BOND CASH FLOWS
	1994	1995	1996	1997	1998
Purchase Price	-1000
Interest		102.5	102.5	102.5	102.5
Sale Price					1000
Sum	-1000	102.5	102.5	102.5	1102.5
YTM	10.25%
buy at discount		BOND CASH FLOWS
	1994	1995	1996	1997	1998
Purchase Price	-900
Interest		102.5	102.5	102.5	102.5
Sale Price					1000
Sum	-900	102.5	102.5	102.5	1102.5
YTM	13.66%
buy at premium		BOND CASH FLOWS
	1994	1995	1996	1997	1998
Purchase Price	-1100
Interest		102.5	102.5	102.5	102.5
Sale Price					1000
Sum	-1100	102.5	102.5	102.5	1102.5
YTM	7.28%

#2? Explain the calculations in each of the two panels below, one at a time. As in #1, consider the inputs and output ? the results. Then, explain the difference between the two panels. Use Bond Questions Support Sheets.xlsx, as for #1 above.

#3- Determine the yield to maturity on a 10-year 6% bond selling at par if the going rate (current interest rate for newly issued bonds of the same quality rating) is 6%? This is a think question; not a calculation question. Briefly explain how you reached your answer.

#4- If Treasury bonds are risk free, why is there a standard deviation around their mean rate of return? Refer to the table on page 17 of this PDF. HINT: Examine the blue treasury interest rate trend in the chart on page 4.

#5? Your pension fund has a sub-portfolio of bonds. The duration of this bond portfolio is 8 years. The current market value of the bond portfolio is $1,000,000. Calculate the price change expected on the bond portfolio if interest rates rise from their current level of 5% to 7%, and discuss whether or not this is an example of interest rate risk.

#6- Explain in one sentence why the duration on a zero coupon bond is equal to its maturity.

n

#1- Explain the calculations in each of the three panels below, one at a time. Explain the purpose of the calculation and the procedure of the calculation, i.e., how the data inputs determine the output - the result. Bond Questions Support Sheets.xlsx (posted on Bb assignment page) has 'live' sheets so you can see how the calculations work. Purchase Price Interest Sale Price Sum YTM -1000 10.25% buy at discount Purchase Price Interest Sale Price Sum YTM 1994 -900 -900 13.66% buy at premium Purchase Price Interest Sale Price Sum YTM 1994 -1100 1996 1997 1998 102.5 102.5 102.5 102.5 102.5 102.5 1000 1102.5 BOND CASH FLOWS 1995 1996 1997 1998 102.5 1994 -1000 BOND CASH FLOWS 1995 102.5 buy at par 102.5 102.5 102.5 102.5 102.5 102.5 1000 1102.5 1997 1998 102.5 1000 1102.5 BOND CASH FLOWS 1995 1996 102.5 -1100 7.28% 102.5 102.5 102.5 102.5 102.5 #2- Explain the calculations in each of the two panels below, one at a time. As in #1, consider the inputs and output - the results. Then, explain the difference between the two panels. Use Bond Questions Support Sheets.xlsx, as for #1 above. SOLVE FOR YTM GIVEN PRICE Market Price Interest Maturity Pmt Sum YTM 0 -932.26 2 3 4 50.00 50.00 50.00 50.00 50.00 50.00 50.00 1,000.00 1,050.00 1 50.00 2 50.00 3 50.00 50.00 -932.26 7.00% 1 50.00 50.00 #3- SOLVE FOR PRICE GIVEN YTM 0 Interest Maturity Pmt Cash Flows Req. R of R Value 4 50.00 1,000.00 1,050.00 7.00% 932.26 Determine the yield to maturity on a 10-year 6% bond selling at par if the going rate (current interest rate for newly issued bonds of the same quality rating) is 6%? This is a think question; not a calculation question. Briefly explain how you reached your answer. #4- If Treasury bonds are risk free, why is there a standard deviation around their mean rate of return? Refer to the table on page 17 of this PDF. HINT: Examine the blue treasury interest rate trend in the chart on page 4. #5- Your pension fund has a sub-portfolio of bonds. The duration of this bond portfolio is 8 years. The current market value of the bond portfolio is $1,000,000. Calculate the price change expected on the bond portfolio if interest rates rise from their current level of 5% to 7%, and discuss whether or not this is an example of interest rate risk. #6- Explain in one sentence why the duration on a zero coupon bond is equal to its maturity