question 3

Prices IS IESUT of the effective annually compounded spot rates below. r0,1 = 9.49% r0,2 = 8.90% r0,3 = 8.40% r0,4 = 8.00% r0,5 = 7.70% r0,6 = 7.50% r0,7= 7.30% r0,8 = 7.15% ro9= 7.00% r0,10 = 6.98% In this market, a 10 year 7 1/8% (7.125%) annual coupon Treasury note sells at a market price that results in an effective annual YTM of 7.16% Ferguson Corp. has just issued 10 year 8 42% (8.50%) annual coupon notes in the primary market at a market price that results in an effective annual YTM of 8.44%. You are a portfolio manager and you own the following three 10 year Ferguson Corp. Notes in your portfolio: 10 year 2% annual coupon notes 10 year 6% annual coupon notes 10 year 12% annual coupon notes Questions 1. (4 points) Use the market YTM for the 10 year 7.125% annual coupon Treasury note and the market YTM of the 10 year 8.5% Ferguson Corp. notes to calculate the market prices for these two notes. 2. (3 points) Adapt the OAS Static Spread Excel spreadsheet to use the spot rates shown above and use goal seek and the market price from #1 above solve for the OAS (round to the nearest basis point) implied by the market price of the Ferguson Corp 8.50% note as of 3/31/2020. 3. 6 points) Use the implied OAS you calculated in #2 and the Treasury spot rates above to solve for the Theoretical Fair Value of each of the three bonds you own in your portfolio as of 3/31/2020. 4. (6 points) Use the Theoretical Fair Values you calculated in #3 to calculate the implied Fair Market effective annual YTMs (rounded to the nearest basis point) of the three note notes you own in your portfolio 5. Explain why the YTMs you calculated in #4 are not identical and comment on how the Law of One Price and the Valuation Principle were applied in this assignment. Prices IS IESUT of the effective annually compounded spot rates below. r0,1 = 9.49% r0,2 = 8.90% r0,3 = 8.40% r0,4 = 8.00% r0,5 = 7.70% r0,6 = 7.50% r0,7= 7.30% r0,8 = 7.15% ro9= 7.00% r0,10 = 6.98% In this market, a 10 year 7 1/8% (7.125%) annual coupon Treasury note sells at a market price that results in an effective annual YTM of 7.16% Ferguson Corp. has just issued 10 year 8 42% (8.50%) annual coupon notes in the primary market at a market price that results in an effective annual YTM of 8.44%. You are a portfolio manager and you own the following three 10 year Ferguson Corp. Notes in your portfolio: 10 year 2% annual coupon notes 10 year 6% annual coupon notes 10 year 12% annual coupon notes Questions 1. (4 points) Use the market YTM for the 10 year 7.125% annual coupon Treasury note and the market YTM of the 10 year 8.5% Ferguson Corp. notes to calculate the market prices for these two notes. 2. (3 points) Adapt the OAS Static Spread Excel spreadsheet to use the spot rates shown above and use goal seek and the market price from #1 above solve for the OAS (round to the nearest basis point) implied by the market price of the Ferguson Corp 8.50% note as of 3/31/2020. 3. 6 points) Use the implied OAS you calculated in #2 and the Treasury spot rates above to solve for the Theoretical Fair Value of each of the three bonds you own in your portfolio as of 3/31/2020. 4. (6 points) Use the Theoretical Fair Values you calculated in #3 to calculate the implied Fair Market effective annual YTMs (rounded to the nearest basis point) of the three note notes you own in your portfolio 5. Explain why the YTMs you calculated in #4 are not identical and comment on how the Law of One Price and the Valuation Principle were applied in this assignment