INV3702
Assignment 2 Semester 2 2024
Unique Number:
Due Date: September 2024
QUESTION 1
The price of the 2-year coupon bond (as a percentage of its par value) is calculated as follows:
• N = 2 years
• I/YR = 2.496%
• PMT = 6
• FV = 100
DISCLAIMER & TERMS OF USE
1. Educational Aid: These study notes are designed to serve as educational aids and should not be considered as a
substitute for individual research, critical thinking, or professional guidance. Students are encouraged to
conduct their own extensive research and consult with their instructors or academic advisors for specific
assignment requirements.
2. Personal Responsibility: While every effort has been made to ensure the accuracy and reliability of the
information provided in these study notes, the seller cannot guarantee the completeness or correctness of all
the content. It is the responsibility of the buyer to verify the accuracy of the information and use their own
judgment when applying it to their assignments.
3. Academic Integrity: It is crucial for students to uphold academic integrity and adhere to their institution's
policies and guidelines regarding plagiarism, citation, and referencing. These study notes should be used as a
tool for learning and inspiration, but any direct reproduction of the content without proper acknowledgment and
citation may constitute academic misconduct.
4. Limited Liability: The seller of these study notes shall not be held liable for any direct or indirect damages,
losses, or consequences arising from the use of the notes. This includes, but is not limited to, poor grades,
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prov
]
, For additional support +27 81 278 3372
QUESTION 1
The price of the 2-year coupon bond (as a percentage of its par value) is calculated as
follows:
• N = 2 years
• I/YR = 2.496%
• PMT = 6
• FV = 100
The present value (PV) is computed to be 106.7541.
The no-arbitrage price of the 2-year coupon bond based on spot (zero-coupon) rates is:
6 106
+ = 106.7546
1.02350 1.025002
The 2-year coupon bond's price equals its no-arbitrage value, therefore the bond is fairly
valued.
QUESTION 2
The trader should buy Bond B.
Reasoning:
• Bond B has a current yield to maturity of 8.5%, which is higher than the average
yield of similar bonds at 8.0%.
• If the trader expects bond yields to return to the yield of the peer group (8.0%), the
price of Bond B will increase as the yield declines to match the average yield.
• Bonds with a higher yield than their peers are generally underpriced, and as the
yield decreases to the peer level, the bond price will rise, allowing the trader to profit
from this price increase.
QUESTION 3
Assignment 2 Semester 2 2024
Unique Number:
Due Date: September 2024
QUESTION 1
The price of the 2-year coupon bond (as a percentage of its par value) is calculated as follows:
• N = 2 years
• I/YR = 2.496%
• PMT = 6
• FV = 100
DISCLAIMER & TERMS OF USE
1. Educational Aid: These study notes are designed to serve as educational aids and should not be considered as a
substitute for individual research, critical thinking, or professional guidance. Students are encouraged to
conduct their own extensive research and consult with their instructors or academic advisors for specific
assignment requirements.
2. Personal Responsibility: While every effort has been made to ensure the accuracy and reliability of the
information provided in these study notes, the seller cannot guarantee the completeness or correctness of all
the content. It is the responsibility of the buyer to verify the accuracy of the information and use their own
judgment when applying it to their assignments.
3. Academic Integrity: It is crucial for students to uphold academic integrity and adhere to their institution's
policies and guidelines regarding plagiarism, citation, and referencing. These study notes should be used as a
tool for learning and inspiration, but any direct reproduction of the content without proper acknowledgment and
citation may constitute academic misconduct.
4. Limited Liability: The seller of these study notes shall not be held liable for any direct or indirect damages,
losses, or consequences arising from the use of the notes. This includes, but is not limited to, poor grades,
academic penalties, or any other negative outcomes resulting from the application or misuse of the information
prov
]
, For additional support +27 81 278 3372
QUESTION 1
The price of the 2-year coupon bond (as a percentage of its par value) is calculated as
follows:
• N = 2 years
• I/YR = 2.496%
• PMT = 6
• FV = 100
The present value (PV) is computed to be 106.7541.
The no-arbitrage price of the 2-year coupon bond based on spot (zero-coupon) rates is:
6 106
+ = 106.7546
1.02350 1.025002
The 2-year coupon bond's price equals its no-arbitrage value, therefore the bond is fairly
valued.
QUESTION 2
The trader should buy Bond B.
Reasoning:
• Bond B has a current yield to maturity of 8.5%, which is higher than the average
yield of similar bonds at 8.0%.
• If the trader expects bond yields to return to the yield of the peer group (8.0%), the
price of Bond B will increase as the yield declines to match the average yield.
• Bonds with a higher yield than their peers are generally underpriced, and as the
yield decreases to the peer level, the bond price will rise, allowing the trader to profit
from this price increase.
QUESTION 3
