INV3702 Assignment 2 (COMPLETE ANSWERS) Semester 2 2024

I

, 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 need to calculate its present value (fair value)
based on the given yield to maturity (YTM) and compare it to
its market price.
Step 1: Calculate Bond C's Present Value
 Bond C Characteristics:
o Time to maturity = 2 years
o Coupon rate = 6%
o Yield to maturity = 2.496%
o Face value = 100 (assumed for simplicity)
Formula for Present Value of a Bond:
Present Value (PV)=(C(1+r)1)+(C+F(1+r)2)\text{Present Value
(PV)} = \left( \frac{C}{(1 + r)^1} \right) + \left( \frac{C + F}{(1 +
r)^2} \right)Present Value (PV)=((1+r)1C)+((1+r)2C+F)