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Exam (elaborations)

INV3702 Assignment 02 Semester 1 2022 Answers

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INV3702 - Investments: Fixed Income Analysis (INV3702)









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INV3702 - Investments: Fixed Income Analysis (INV3702)
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  • inv3702 assignment 02 semester 1 2022 answers

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FIXED INCOME ANALYSIS
INV3702
ASSIGNMENT 02 SEMEMSTER 1 2022

, Work through lessons 1 to 7; then answer the following questions. Submit your assignment via
myUnisa.


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 E is overvalued, undervalued or fairly valued. All coupons are paid annually.
(3)


The price of the 3-year coupon bond (as a percentage of par) is:

N = 3; I/Y = 2.711; PMT = 6; FV = 100; CPT PV = −109.35




The no-arbitrage price of the 3-year coupon bond based on spot (zero-coupon) rates is:

.02350 + 6 / (1.02500)2 + 106 / (1.02725)3 = 109.35

Because the 3-year coupon bond's price equals its no-arbitrage value, the bond is fairly valued.

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