RSM 430 : Fixed Income Securities
EXAM
SOLUTIONS
Last Name: ______________________________________
First Name: ______________________________________
Student Number:
Instructions:
1. Write all of your answers on the examination paper.
2. Aids allowed: silent electronic calculator and one single-sided 8.5”x11”sheet with
formulas and/or notes.
Page 1 of 11
, Part A (40 marks) Provide brief explanations or answers for the following
questions.
1. (4 marks) Nissan Canada issued $300 million of bonds in the market at a coupon rate
of 4%. That is an annual rate that compounds semi-annually. Nissan would like to
earn 100 bps on the financing rate it will offer to its customers. Assume that the
financing rate to customers will be a monthly rate. Please calculate for Nissan the
company's monthly rate and the monthly rate they can offer their customers in order
to make 100 bps. Show all your work.
for Nissan: (1+4%/2)^2/12 - 1 = 0.3305% per month
for customers: (1+5%/2)^2/12 -1 = 0.412 per period
2. (5 marks) Toyota (USA) and Toyota (Canada) have both issued 3 year floating rate
notes. The floating rate notes reset monthly (on the first of the month) and are priced
at 1 month US LIBOR for Toyota USA and 1 month CDOR for Toyota Canada plus a
credit spread of 20 bps (for each issuer). At the beginning of the month, each index is
at 1%. Assume an investor owns both these FRNs in his portfolio. What is the cash
interest (for one month) for each of these FRNs? Assume October has 31 days.
Ignoring the exchange rate, why is the cash interest earned different in each case?
1) For Toyota USA
coupon rate = 1 mo LIBOR + 20bps= 1.20% annual rate
cash interest = 1.20% x 1,000 x 31 /360days = $1.033
2) For Toyota Canada
coupon rate = 1 mo CDOR + 20bps= 1.20% annual rate
cash interest = 1.20% x 1,000 x 31 /365days = $1.0191
Due to the different day count conventions, the cash interest in Canada
is slightly higher for the month
3. (6 marks) Assume a bond is callable, provide a brief explanation under the following
two scenarios:
a) If interest rates are increasing:
Page 2 of 11
EXAM
SOLUTIONS
Last Name: ______________________________________
First Name: ______________________________________
Student Number:
Instructions:
1. Write all of your answers on the examination paper.
2. Aids allowed: silent electronic calculator and one single-sided 8.5”x11”sheet with
formulas and/or notes.
Page 1 of 11
, Part A (40 marks) Provide brief explanations or answers for the following
questions.
1. (4 marks) Nissan Canada issued $300 million of bonds in the market at a coupon rate
of 4%. That is an annual rate that compounds semi-annually. Nissan would like to
earn 100 bps on the financing rate it will offer to its customers. Assume that the
financing rate to customers will be a monthly rate. Please calculate for Nissan the
company's monthly rate and the monthly rate they can offer their customers in order
to make 100 bps. Show all your work.
for Nissan: (1+4%/2)^2/12 - 1 = 0.3305% per month
for customers: (1+5%/2)^2/12 -1 = 0.412 per period
2. (5 marks) Toyota (USA) and Toyota (Canada) have both issued 3 year floating rate
notes. The floating rate notes reset monthly (on the first of the month) and are priced
at 1 month US LIBOR for Toyota USA and 1 month CDOR for Toyota Canada plus a
credit spread of 20 bps (for each issuer). At the beginning of the month, each index is
at 1%. Assume an investor owns both these FRNs in his portfolio. What is the cash
interest (for one month) for each of these FRNs? Assume October has 31 days.
Ignoring the exchange rate, why is the cash interest earned different in each case?
1) For Toyota USA
coupon rate = 1 mo LIBOR + 20bps= 1.20% annual rate
cash interest = 1.20% x 1,000 x 31 /360days = $1.033
2) For Toyota Canada
coupon rate = 1 mo CDOR + 20bps= 1.20% annual rate
cash interest = 1.20% x 1,000 x 31 /365days = $1.0191
Due to the different day count conventions, the cash interest in Canada
is slightly higher for the month
3. (6 marks) Assume a bond is callable, provide a brief explanation under the following
two scenarios:
a) If interest rates are increasing:
Page 2 of 11
