FIN 3213 - Investment

Bond Valuation

Name: __________________________________________________________

Q1.You know something significant is going to happen with a company, but don't know which direction the stock price is going to move. What's your best strategy?

My best strategy is straddle. Straddle is the best strategy to apply when we think that the stock is going to make a big move, but unsure of the direction of the move.

Q2.Company ABC's stock is trading at $35 per share. You bought 5 call options with strike price of $35 and expiration in two weeks for $1.75 per call.

Is the call in the money, at the money, or out of the money when you bought it?

The call is at money when I bought it. Because the stock price is equal with the strike price at the time I bought it which was %35.

What's the time value of the call option?

If on expiration date, the stock price reaches $36.25 per share, will you have made or lost money? By how much?

Q3.A coupon bond with 6% annual coupon rate and 5 years left to maturity now sells at $1,135.

1.Calculate duration for the bond using the step-by-step weighted average time to maturity method. You may use the duration function to check your result, that using the function alone does not earn you any credit.

2.Make a data table demonstrating the impact of changing coupon rate on bond price.

Q4.You're a bond portfolio manager and expect the interest rate to go down. Should you move money into long bonds or short bonds? Why?

Q5.Do Investors always want higher convexity? Why or why not?

Q6.10 days ago, you bought 10 silver futures contracts with May delivery and strike price of $17.50 per ounce, when silver was trading at $17.50 per ounce. The margin requirement is 10% of the total contract value. Below is the price movement for the past 10 days:

0 1 2 3 4 5 6 7 8 9 10

$17.50 $17.58 $17.49 $17.33 $17.26 $16.99 $17.30 $17.65 $17.77 $17.55 $17.47

Calculate the mark-to-market end-of-day balances of your account.