INV3702 - OCT_NOV 2017 (1).pdf

INV3702 – Memo – Oct/Nov 2017 Examination

Question Answer Explanation
1 4 N=3X2=6
I/Y = ?
PV = -R98 120
PMT = 0.10 X R100 000 = R10 = R5000
FV = R100 000
CPT I/Y = 5.37% Semi Annual X 2 = 10.75%
2 4 N = 10 X 2 = 20
I/Y = 8.8% / 2 = 4.4%
PV = ?
PMT = 0.095 X R10 000 = R = R475
FV = R10 000
CPT PV = R10 459.25
3 4 Price Change = D X Change in Yield
Price Change = 3.41 X 0.012
Price Change = 0.04 X 100 = 4.09%
4 2 = 1.5% + 1.5% = 3.00%
5 4 New coupon rate = reference rate ± quoted margin
6 1 N = 7 X 2 = 14
I/Y = 9. = 4.8%
PV = ?
PMT = 0.12 X R1000 = R =R60
FV = 1000
CPT PV = R1120.32

N=3X2=6
I/Y = ?
PV = -1120.32
PMT = R60
FV = R1050
CPT I/Y = 4.42% Semi Annual X 2 = 8.84%
7 2 Inflation adjustments are made semi-annually, Coupon rate is fixed, Yields on TIPS are
good estimates of real rates of interest, Coupon payments are based on inflation
adjusted par values
8 4 Bond A – Callable anytime one year from today , 10 Years Maturity
Bond B – Non-Callable, 10 Years to maturity

Callable bonds have more reinvestment risk, At lower yields, price volatility is lower
(Call option will decline in value) Negative convexity means lower price increases and
higher price declines.
9 2 The bond with the lowest duration will suffer the least (smallest price decrease) from
an increase in rates. The higher the coupon, higher YTM, and shorter time to maturity,
the lower the duration will be.
10 4 No Marginal tax rate given