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INV3702 ASSIGNMENT 2 SEM 2 OF 2026 EXPECTED SOLUTIONS

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Fixed Income Analysis (INV3702)
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THIS DOCUMENT CONTAINS INV3702 ASSIGNMENT 2 SEM 2 OF 2026 EXPECTED SOLUTIONS. USE IT AS A GUIDE TO SCORE TOP MARKS

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INV3702 Assignment 2 Solutions




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, Question 1

To determine if Bond C is overvalued, undervalued, or fairly valued, I need to:

1. Calculate the theoretical price of Bond C using the spot rate curve derived from
zero-coupon bonds

2. Compare this to the actual market price derived from Bond C's YTM

Step 1: Derive spot rates from zero-coupon bonds

From Bond B (1-year zero):

 S₁ = 2.350%

From Bond D (2-year zero):

 S₂ = 2.500%

From Bond F (3-year zero):

 S₃ = 2.725%

Step 2: Calculate theoretical price of Bond C using spot rates

Bond C: 6% coupon, 2 years to maturity, YTM = 2.496%

Theoretical price = 6/(1+S₁) + 106/(1+S₂)²
= 6/(1.02350) + 106/(1.02500)²
= 5.8622 + 106/(1.050625)
= 5.8622 + 100.8951
= R106.7573

Step 3: Calculate actual market price using YTM

Actual price = 6/(1.02496) + 106/(1.02496)²
= 5.8537 + 106/(1.050542)
= 5.8537 + 100.9007
= R106.7544

Step 4: Compare prices

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