Name_____________________

AX Corporation offers the following bond

Date of Sale: 12/15/2010

Offer Price: $1,000 (bond sold at par)

Maturity Date: 12/15/2016

Coupon Rate: 7%, paid annually on Dec 15, 2011, ... , 2016

Principal Repayment: 12/15/2016

1-Use Excel's IRR function to compute the bond's YTM.

2-Make a table (Data Table) with the bond price when the market interest rate varies from 0%, 1%, ... , 14%. Graph

3-Suppose you buy the RU Corp. bond on 5/15/2010 and that its market price on that date is $1,050. Calculate the YTM using XIRR since the IRR function will not correctly compute the YTM of this bond.

CG Corp. issues a bond at the same time as AX Corp. Like the AX's bond,

CG's bond pays a 7% coupon on its face value of $1,000, is issued on 12/15/2010, and matures on 12/15/2016. The only difference between the two bonds is that CG's interest payment is semiannual.

4-Use Excel's IRR function to compute the bond's YTM (EAR).

5-Use Excel's XIRR function to compute the bond's YTM.

In the US bond markets, the quoted price for a bond is not the amount asked to pay for the bond because it does not include the accrued interest on the bond. Suppose you are going to buy the AX Corp. on 4/3/2011 and the bond dealer asks $1,050 for the bond.

6-Calculate the actual price paid for the bond.

7-Use Excel's XIRR function to compute the bond's YTM.

8-Use Excel's YIELD function to compute the bond's YTM (Basis= 3).

Suppose you purchase a 26-week T-bill with face value of $10,000 for $9,570.

9-Use Excel's RATE function to compute the bond's YTM.

10- Calculate the daily interest rate.

11- Calculate the EAR of the daily interest rate calculated in question 10).

Consider a 5% semiannual coupon 20-year option-free bond selling at 113.6777 to yield 4%.

Find the price of this bond for yields that range from 2% to 8%. Make a table for with the prices at the following yields: 2%, 3%, 3.5%, 3.9%, 3.99%, 4%, 4.01%, 4.10%, 4.50%, 5%, 6%, 7%, and 6%.

12- Calculate the percentage price change from the initial yield of 4%.

13- Calculate the Effective Duration by changing the yield down and up by 10 basis point.

14- Calculate the Macaulay Duration (with a table and with the Excel formula) and Modified Duration (from the table and with the Excel formula)

15- Calculate the Effective convexity measure

16- Calculate the convexity measure (with a table)

17- Approximate the percentage price change based on the Effective Duration

18- Approximate the percentage price change based on the Effective Duration and the Effective Convexity Adjustment

19- Approximate the percentage price change based on the Modified Duration

20- Approximate the percentage price change based on the Modified

Duration + the Convexity Adjustment

On-the-run treasuries

Maturity

Yield (%)

3 mo

5.29

6 mo

5.49

1 year

5.90

2 years

6.27

3 years

6.45

4 years

6.54

5 years

6.63

10 years

6.87

20 years

7.08

21- Graph the Spot yield curve based on the info provided above.

22- Using interpolation estimate the sport rates for the missing short term maturities (less than a year) and the long term maturities (between 5 years and 20 years)

23- Graph again the spot yield curve based on the results found in question 27.

24- Estimate the implied yield curve for next year (for annual maturities equal or less than 5 years) - 1, 2, 3, 4, and 5 years.

Consider the following two bonds:

Bond A

Term to maturity 10 years from today

Face value: $1,000

Coupon: 10%, annual

Bond B

Term to maturity 20 years from today

Face value: $1,000

Coupon: 10%, annual

25- Make a table comparing the bond prices (Bond A and Bond B) when the market interest rate varies from 5, 6, ..., 17% (Data Table). Explain using a graph whether you can conclude or not that "the longer-term bond's price is more sensitive to changes in the market interest rate".