FIXED INCOME ANALYSIS
INV3702
ASSIGNMENT 02 SEMEMSTER 1 2023
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:
6 + 6 + 106
1.02350 (1.02500)2 (1.02725)3 = 109.35
The 3-year coupon bond's price equals its no-arbitrage value, therefore the bond is fairly
valued.
INV3702
ASSIGNMENT 02 SEMEMSTER 1 2023
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:
6 + 6 + 106
1.02350 (1.02500)2 (1.02725)3 = 109.35
The 3-year coupon bond's price equals its no-arbitrage value, therefore the bond is fairly
valued.
