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Question 1. Bond pricing using spot rates You have a 2 year semiannual coupon bond with 6 percent coupon rate and attempt to value of
Question 1. Bond pricing using spot rates You have a 2 year semiannual coupon bond with 6 percent coupon rate and attempt to value of the bond. To price the value of the bond, you need to use a cash flow table as below. (Note that all the yields are continuously compounded.) Zero Rate CF Present Value of CF Maturity 0.5 1.0 1.5 2.0 5.11 5.20 6.01 6.55 106 a. Compute the missing present values (PV) of each cash flow. b. Compute the value of bond price by taking sum of all present values. c. Compute the yield to maturity (YTM). d. Compute the duration and convexity. e. What is the new bond price if the term structure of yields move up 15 basis points (bp). f. What is the new bond price if the YTM move up 15 bp. Question 2. Bond pricing using YTM You have a 2 year coupon bond with a coupon rate of 6 percent and a yield-to-maturity of 6.5 (continuously compounded). a. Compute the theoretical bond price. (Hint: Instead of using zero (spot) rate, use the yield to maturity) b. Compute the duration and convexity. c. Compute the new bond price when the yield to maturity moves up 10 basis points. d. Approximately compute the new bond price using only the obtained duration. (Hint: AP = -D. Ay) e. Approximately compute the new bond price with the duration and convexity. (Hint: AP = -P.D.Ay+P.C. (Ay)2 Question 1. Bond pricing using spot rates You have a 2 year semiannual coupon bond with 6 percent coupon rate and attempt to value of the bond. To price the value of the bond, you need to use a cash flow table as below. (Note that all the yields are continuously compounded.) Zero Rate CF Present Value of CF Maturity 0.5 1.0 1.5 2.0 5.11 5.20 6.01 6.55 106 a. Compute the missing present values (PV) of each cash flow. b. Compute the value of bond price by taking sum of all present values. c. Compute the yield to maturity (YTM). d. Compute the duration and convexity. e. What is the new bond price if the term structure of yields move up 15 basis points (bp). f. What is the new bond price if the YTM move up 15 bp. Question 2. Bond pricing using YTM You have a 2 year coupon bond with a coupon rate of 6 percent and a yield-to-maturity of 6.5 (continuously compounded). a. Compute the theoretical bond price. (Hint: Instead of using zero (spot) rate, use the yield to maturity) b. Compute the duration and convexity. c. Compute the new bond price when the yield to maturity moves up 10 basis points. d. Approximately compute the new bond price using only the obtained duration. (Hint: AP = -D. Ay) e. Approximately compute the new bond price with the duration and convexity. (Hint: AP = -P.D.Ay+P.C. (Ay)2
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