Problem 2. (10 points) Throughout the remainder of this exam, you should use the following information on the current (t = 0) yield curve. That is, unless stated otherwise, use the information below for calculating any values or yields needed in any of the subsequent Problems in this exam. Today (5/27/22), the prices on zero-coupon US Treasury STRIPS are as follows: Maturity In years Price (per $100 in face value) Effective Annual YTM 1 98.50 (106/98.5) - 1 .61523 1/2 95.20 (98.5/95.2) -1 -024900 91.75 (95-291-75) 13. .029116 .03501. 87.14 (9175/87.14) - 82.19 (87.14/82-19) 15-1 1.04000. Questi ~ 3 4 5 2 Again, use the data on the current yield curve from Problem 2. Steve Inc. has someone (Steve) in it's treasury department who thinks he can exploit some mis- pricings in the bond market. On behalf of Steve Inc., Steve issues one thousand (1000) 2-year two-percent annual pay coupon bonds, each with a face value of $1000 each of the 1000 bonds pays its 2% coupons once a year (at the end of the year). The market perceives that Steve Inc. has no risk of default. Steve uses the proceeds from this sale to invest in 3-year zeros, as priced in Problem 2 above. Questions: a. The sale of the bonds are Steve Inc. liabilities. What is the sale price per $1000 in face value that Steve Inc. gets for these bonds? Show your work. (3 points) 1000 1000 1000 PX-CITY 15,000 r 2yr 1.02 27- FV 100 2 b. How much money does Steve Inc. get from selling 1000 of these bonds? (2 points) 1000 x 5000 A 5,000,000 c. What is the duration of these bonds? (5 points.) Show your work below. [CF / (1+r)] Problem 2. (10 points) Throughout the remainder of this exam, you should use the following information on the current (t = 0) yield curve. That is, unless stated otherwise, use the information below for calculating any values or yields needed in any of the subsequent Problems in this exam. Today (5/27/22), the prices on zero-coupon US Treasury STRIPS are as follows: Maturity In years Price (per $100 in face value) Effective Annual YTM 1 98.50 (106/98.5) - 1 .61523 1/2 95.20 (98.5/95.2) -1 -024900 91.75 (95-291-75) 13. .029116 .03501. 87.14 (9175/87.14) - 82.19 (87.14/82-19) 15-1 1.04000. Questi ~ 3 4 5 2 Again, use the data on the current yield curve from Problem 2. Steve Inc. has someone (Steve) in it's treasury department who thinks he can exploit some mis- pricings in the bond market. On behalf of Steve Inc., Steve issues one thousand (1000) 2-year two-percent annual pay coupon bonds, each with a face value of $1000 each of the 1000 bonds pays its 2% coupons once a year (at the end of the year). The market perceives that Steve Inc. has no risk of default. Steve uses the proceeds from this sale to invest in 3-year zeros, as priced in Problem 2 above. Questions: a. The sale of the bonds are Steve Inc. liabilities. What is the sale price per $1000 in face value that Steve Inc. gets for these bonds? Show your work. (3 points) 1000 1000 1000 PX-CITY 15,000 r 2yr 1.02 27- FV 100 2 b. How much money does Steve Inc. get from selling 1000 of these bonds? (2 points) 1000 x 5000 A 5,000,000 c. What is the duration of these bonds? (5 points.) Show your work below. [CF / (1+r)]
