INV3702 Assignment 2 (COMPLETE ANSWERS) Semester 2 2024

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,NV3702 Assignment 2 (COMPLETE ANSWERS) Semes
ter 2 2024 - DUE September 2024 ; 100% T
RUSTED Comple
Question 1 You observe the following sovereign bonds. Time to
maturity Coupon Yield to maturity Bond A 1 year 6% 2.342%
Bond B 1 year 0% 2.350% Bond C 2 years 6% 2.496% Bond D 2
years 0% 2.500% Bond E 3 years 6% 2.711% Bond F 3 years 0%
2.725% Determine whether Bond C is overvalued, undervalued
or fairly valued. All coupons are paid annually. (3)
To determine whether Bond C is overvalued, undervalued, or
fairly valued, we can compare its price to the price of similar
bonds based on their yield to maturity (YTM).
Here’s a step-by-step approach to determine Bond C's
valuation:
1. Calculate the Price of Each Bond:
o Price of Bond A:
Price=6(1+0.02342)+100(1+0.02342)\text{Price} = \
frac{6}{(1 + 0.02342)} + \frac{100}{(1 +
0.02342)}Price=(1+0.02342)6+(1+0.02342)100
o Price of Bond B:
Price=0(1+0.02350)+100(1+0.02350)\text{Price} = \
frac{0}{(1 + 0.02350)} + \frac{100}{(1 +
0.02350)}Price=(1+0.02350)0+(1+0.02350)100
o Price of Bond C:
Price=6(1+0.02496)+6(1+0.02496)2+100(1+0.02496)2

, \text{Price} = \frac{6}{(1 + 0.02496)} + \frac{6}{(1 +
0.02496)^2} + \frac{100}{(1 +
0.02496)^2}Price=(1+0.02496)6+(1+0.02496)26
+(1+0.02496)2100
o Price of Bond D:
Price=0(1+0.02500)+100(1+0.02500)2\text{Price} = \
frac{0}{(1 + 0.02500)} + \frac{100}{(1 +
0.02500)^2}Price=(1+0.02500)0+(1+0.02500)2100
o Price of Bond E:
Price=6(1+0.02711)+6(1+0.02711)2+6(1+0.02711)3+1
00(1+0.02711)3\text{Price} = \frac{6}{(1 + 0.02711)}
+ \frac{6}{(1 + 0.02711)^2} + \frac{6}{(1 + 0.02711)^3}
+ \frac{100}{(1 + 0.02711)^3}Price=(1+0.02711)6
+(1+0.02711)26+(1+0.02711)36+(1+0.02711)3100
o Price of Bond F:
Price=0(1+0.02725)+0(1+0.02725)2+100(1+0.02725)3
\text{Price} = \frac{0}{(1 + 0.02725)} + \frac{0}{(1 +
0.02725)^2} + \frac{100}{(1 +
0.02725)^3}Price=(1+0.02725)0+(1+0.02725)20
+(1+0.02725)3100
2. Compare Bond C’s Price to Similar Bonds:
o Bond C is a 2-year bond with a 6% coupon and a YTM
of 2.496%.