CHAPTER 12 - BOND FUNDAMENTALS AND VALUATION Question 1: Bond Valuation The Shamrock Corporation has just issued two bonds, 1) a 15-year, $1000 par zero-coupon bond with 12% yield to maturity and 2) a 3-year, 6.5% coupon, $100 par bond with a yield to maturity of 7%. (Assume semi-annual compounding) a) What is the market price of the zero-coupon bond in three year? [3 marks] b) What is the current market price of a coupon bond? [3 marks] [Q1 Total: 6 marks] Question 2: Bond Yields Assume that you purchased a 9% coupon, 10-year, $1000 par, semi-annual payment bond with a current price of $915. Calculate its: a) Yield to maturity [3 marks] b) Yield to call if the bond is callable in 3-years at a 5% premium. [3 marks] c) Yield to put if the bond is puttable in 3-years at a 5% discount. [3 marks] [Q2 Total: 9 marks] CHAPTER 12 - BOND ANALYSIS AND PORTFOLIO MANAGEMENT STRATEGIES Question 3: Duration and Convexity of a single Bond Consider a 3-year bond with a face value of $100 that pays an annual coupon of 7% and has (original) yield to maturity of 8%. Calculate the a) Modified duration. [4 marks] b) Convexity. [3 marks] c) Price change, in response to the decrease in yield to maturity to 7.50%, incorporating both duration and convexity adjustments. [3 marks] [Q3 Total: 10 marks] Questions 4: Duration and Convexity of a Portfolio of Bonds Suppose an investor holds a portfolio of three bonds, with the dollar allocations and security characteristics shown as follows: Bond Face Value ($millions) Annual Coupon (%) Maturity (Years) Yield (%) Market Value ($ millions) Modified Duration Convexit y A 38 7.5 10 8 36.73 6.78 61.54 B 20 4 3 5.5 19.19 2.73 10.22 C 35 6 5 6.5 34.27 4.18 22.66 Calculate the: a) Portfolio modified duration. [2 marks] b) Portfolio convexity. [2 marks] [Q4 Total: 4 marks] Questions 5: Matched-Funding Bond Portfolio Management Strategies - Cash-Matching Strategy Suppose you are a bond portfolio manager, create a portfolio of three annual coupon paying bonds for an investor which generates a cash flows that match with his annual liabilities of next three years, as given below. The term to maturity for each bond of the portfolio varies from one to three years. 2020 2021 2022 Liabilities $28,500 $37,500 $44,800 [Q5 Total: 6 marks]