INV3702 ASSIGNMENT 2
SEMESTER 1 - 2022
, Question 1
Determine whether Bond E is overvalued, undervalued or fairly valued. All coupons are
paid annually.
The price of the 3-year coupon bond (as a percent of par) is:
N = 3;
I/YR = 2.711;
PMT = 5;
FV = 100;
Compute PV = –106.51
The no-arbitrage price of the 3-year coupon bond based on spot (zero-coupon) rates is:
=
= 4.8852 + 4.7591 + 96.8637
= 106.51
The 3-year coupon bond's price equals its no-arbitrage value, therefore the bond is fairly
valued.
1
SEMESTER 1 - 2022
, Question 1
Determine whether Bond E is overvalued, undervalued or fairly valued. All coupons are
paid annually.
The price of the 3-year coupon bond (as a percent of par) is:
N = 3;
I/YR = 2.711;
PMT = 5;
FV = 100;
Compute PV = –106.51
The no-arbitrage price of the 3-year coupon bond based on spot (zero-coupon) rates is:
=
= 4.8852 + 4.7591 + 96.8637
= 106.51
The 3-year coupon bond's price equals its no-arbitrage value, therefore the bond is fairly
valued.
1
