Question 2 (15 marks)

You have invested in a commercial bond issued by FHL, listed on SPX. The bond has a face value of $150,000 and pays

coupons every four months at a rate of 8% p.a. The bond matures on 30th April, 2025. Due to some unforeseen

circumstances, you urgently need to liquidate the bond and decide to sell the bond in the secondary market today,

18th June, 2020. Current yields on similar bonds are 9.5% p.a.

Required:

(Show all working else penalties will apply. Exchange rates should be rounded off to 4.d.p., whereas all other

calculator-values are to be rounded off all to 2d.p. Clearly label your answers with corresponding question number

and/or its associated parts.)

a. Calculate the price of the bond if it is held to maturity. (5m)

b. Calculate the price of the bond if it was sold today. (5m)

c. Assume you sold the bond today to Investor X. On 26th January, 2025 Investor X resold the bond in the secondary

market to Investor Y. At the time of sale, current yields on similar bonds were 7% p.a. Calculate the price that

Investor Y paid for the bond. (5m)

Question 3 (14 marks)

An institutional investor invests in a commercial bond for a term of six years. As per the bond agreement, the investor

will receive annual periodic payments at a rate of 10% p.a. The face value of the bond is $50,000 which is also its

current market price.

Required:

(Show all working else penalties will apply. Exchange rates should be rounded off to 4.d.p., whereas all other

calculator-values are to be rounded off all to 2d.p. Clearly label your answers with corresponding question number

and/or its associated parts.)

a. Calculate the Duration of this bond. (4m)

b. Suppose interest rates were forecast to fall by 100 basis points. Using Duration calculated in (a) above, calculate

the percentage change in price of this bond. (1m)

c. What is the new price of this bond due to the change calculated in (b) above? (1m)

d. Now consider using the bond pricing formula to calculate the bond price. If interest rates were forecast to fall by

100 basis points, what would be the new price of this bond? (3m)

e. Calculate the difference (if any) between the two prices calculated in (c) and (d) respectively. Briefly explain the

difference between the two prices? (1m)

f. Calculate the convexity of this bond. (2m)

g. Suppose interest rates were forecast to fall by 100 basis points. Using this information and after adjusting for

convexity, calculate the new price of this bond. Comment on the difference between this new price and the price

calculated in (d) above. (2m)

Question 4 (5 marks)

A Solomon Island based company has a foreign currency invoice payable in Fijian Dollars (FJD) in one month. Due to

exchange rate fluctuations, the company's exposure is at risk, hence it decides to enter into a forward exchange

contract with its bank. Both countries use a 365-day year; assume 30-day contract.

Given the following data:

FJD/SBD (spot): 15.1234 - 550

One-month Solomon Is. interest rate: 5% p.a.

One-month Fijian interest rate: 4% p.a.

Required:

(Show all working else penalties will apply. Exchange rates should be rounded off to 4.d.p., whereas all other

calculator-values are to be rounded off all to 2d.p. Clearly label your answers with corresponding question number

and/or its associated parts.)

a. Calculate the SBD/FJD exchange rate. (1.5m)

b. Calculate the forward points. (2.5m)

c. Based on the forward points calculated in (a) above, calculate the forward rate offered by the bank. (1m)

Question 5 (6 marks)

You are the proprietor of a medium sized business called 'Must Buy', specialized in selling household items. Due to

popular demand, you are considering opening an outlet in the neighbouring town. You plan to have an investment

horizon of 5 years. After thorough analysis and evaluation and seeking assistance from your accountant brother, you

gather the following information:

Total investment to establish the outlet would be around $180,000.

60% of the total investment value will be contributed by you.

After sourcing the market, Kontiki Finance is willing to lend you the balance of the amount needed at the best

rate of 4% p.a. fixed for the first year and 5.5% p.a. variable rate thereafter until maturity, compounded annually.

Annual ordinary repayments will be made as per your agreement with Kontiki Finance.

Required:

(Show all working else penalties will apply. Exchange rates should be rounded off to 4.d.p., whereas all other

calculator-values are to be rounded off all to 2d.p. Clearly label your answers with corresponding question number

and/or its associated parts.)

a. Calculate the annual instalment amount for the first year. (2m)

b. Calculate the annual instalment amount that will be paid in the second year. (4m)