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2. (Modified from Question #11, Chapter 2) Suppose that you are reviewing a price sheet for bonds and see the following prices (per $100 par) reported. You observe what seem to be several errors. Without calculating the price of each bond, indicate which bonds seem to be reported incorrectly and explain why. Bond Price Coupon Rate (%) Required Yield (%) U 90 6 9 V 96 9 8 W 110 8 6 X 105 0 5 Y 107 7 9 Z 100 6 6 3. Assume that the formula for the coupon rates of a floater and an inverse floater are: Floater coupon rate: reference rate +1.5% Inverse floater coupon rate: 12% - reference rate Answer the following questions: a. What is the coupon rate of the fixed rate collateral for these two floating rate bonds? b. Suppose the floor for the inverse floater is 1%. What would be the cap of the floater? 4. What is the relationship between a bond's dirty price and clean price? Under what condition, a bond's dirty price is different from its clean price? 5. A bond face value $1000. The maturity of the bond is 5 years. The annualized yield of maturity for the bond is 6% and its annual coupon rate is 8% being semiannually paid. The bond was issued on 7/1/2003, and bought on 12/1/2005. Compute the following items: (1) the dirty price of the bond, (2) its clean price, and (3) the accrued interest. 6. Calculate the yield spread of the floater discussed on page 45 to 46 when the maturity of the bond is 3 years and its coupon rate is reference rate + 100 basis points where the initial reference rate is 9%. The price of the bond is 99.3098 and its par value is 100. 7. Suppose you have developed a bond portfolio using the bonds listed below (per $100 par value) reported. All the bonds make semi-annual coupon payments. Bond Coupon rate (%) Number of years price A 8 2 70 B 6 2 105 10 What is the yield to maturity of the above bond portfolio based on the cash flow yield? 4 99 8. (Modified from Question #13, Chapter 3) What is the total return of a 20-year zero coupon bond that offering a yield to maturity of 8% if the bond is held to maturity? 9. (Modified from Question #16, Chapter 3) Suppose that an investor with a 5-year investment horizon is considering purchasing a 7-year 9% coupon bond selling at par. The investor expects that he can reinvest the coupon payments at an annual interest rate of 9.4% and that at the end of the investment horizon 2-year bonds will be selling to offer a yield to maturity of 11.2%. What is the total return for this bond? FIN7037: Fixed Income Security Analysis Homework 1 Due: 9/14/2021 Questions directly related to lectures: 1. (Modified from Question #7, Chapter 2) A pension fund manager knows that the following liabilities must be satisfied Year from Now Liability (in million) 1 $2.0 2 3.0 3 4 5.8 Suppose that the pension fund manager wants to invest a sum of money that will satisfy this liability stream. Assuming that any amount that can be invested today can earn an annual interest rate of 7.6%, how much must be invested today to satisfy this liability stream? 5.4 2. (Modified from Question #11, Chapter 2) Suppose that you are reviewing a price sheet for bonds and see the following prices (per $100 par) reported. You observe what seem to be several errors. Without calculating the price of each bond, indicate which bonds seem to be reported incorrectly and explain why. Bond Price Coupon Rate (%) Required Yield (%) U 90 6 9 V 96 9 8 W 110 8 6 X 105 0 5