INV3702
Assignment 2 Semester 1 2025
Unique Number:
Due Date: May 2025
QUESTION 1
The price of the 2-year coupon bond (as a percent of par) is:
N = 2; I/YR = 2.496; PMT = 6; FV = 100;
Compute PV = 106.75
The no-arbitrage price of the 2-year coupon bond based on spot (zero-coupon) rates is:
The 2-year coupon bond's price equals its no-arbitrage value, therefore the bond is fairly
valued.
DISCLAIMER & TERMS OF USE
Educational Aid: These study notes are intended to be used as educational resources and should not be seen as a
replacement for individual research, critical analysis, or professional consultation. Students are encouraged to perform
their own research and seek advice from their instructors or academic advisors for specific assignment guidelines.
Personal Responsibility: While every effort has been made to ensure the accuracy and reliability of the information in
these study notes, the seller does not guarantee the completeness or correctness of all content. The buyer is
responsible for verifying the accuracy of the information and exercising their own judgment when applying it to their
assignments.
Academic Integrity: It is essential for students to maintain academic integrity and follow their institution's policies
regarding plagiarism, citation, and referencing. These study notes should be used as learning tools and sources of
inspiration. Any direct reproduction of the content without proper citation and acknowledgment may be considered
academic misconduct.
Limited Liability: The seller shall not be liable for any direct or indirect damages, losses, or consequences arising from
the use of these notes. This includes, but is not limited to, poor academic performance, penalties, or any other negative
consequences resulting from the application or misuse of the information provided.
, For additional support +27 81 278 3372
QUESTION 1
The price of the 2-year coupon bond (as a percent of par) is:
N = 2; I/YR = 2.496; PMT = 6; FV = 100;
Compute PV = 106.75
The no-arbitrage price of the 2-year coupon bond based on spot (zero-coupon) rates
is:
The 2-year coupon bond's price equals its no-arbitrage value, therefore the bond is
fairly valued.
QUESTION 2
Bond B has a current yield of 8.5%, which is higher than the average yield of similar
bonds (8.0%). This suggests that Bond B is underpriced compared to its peers. If
the bond's yield moves back in line with the peer group yield, its price will rise.
Therefore, buying Bond B now would allow the trader to benefit from the price
increase as the yield normalizes.
QUESTION 3
Ms Koko aims to reduce her portfolio's Macaulay duration from 12 years to 6 years
by selling a portion of her current holdings and reinvesting in shorter-duration bonds.
She has two bond options: Bond Y, a 5-year semiannual-coupon bond with a
Macaulay duration of approximately 5 years, and Bond Z, a 4-year zero-coupon
bond with a Macaulay duration of 4 years.
Assignment 2 Semester 1 2025
Unique Number:
Due Date: May 2025
QUESTION 1
The price of the 2-year coupon bond (as a percent of par) is:
N = 2; I/YR = 2.496; PMT = 6; FV = 100;
Compute PV = 106.75
The no-arbitrage price of the 2-year coupon bond based on spot (zero-coupon) rates is:
The 2-year coupon bond's price equals its no-arbitrage value, therefore the bond is fairly
valued.
DISCLAIMER & TERMS OF USE
Educational Aid: These study notes are intended to be used as educational resources and should not be seen as a
replacement for individual research, critical analysis, or professional consultation. Students are encouraged to perform
their own research and seek advice from their instructors or academic advisors for specific assignment guidelines.
Personal Responsibility: While every effort has been made to ensure the accuracy and reliability of the information in
these study notes, the seller does not guarantee the completeness or correctness of all content. The buyer is
responsible for verifying the accuracy of the information and exercising their own judgment when applying it to their
assignments.
Academic Integrity: It is essential for students to maintain academic integrity and follow their institution's policies
regarding plagiarism, citation, and referencing. These study notes should be used as learning tools and sources of
inspiration. Any direct reproduction of the content without proper citation and acknowledgment may be considered
academic misconduct.
Limited Liability: The seller shall not be liable for any direct or indirect damages, losses, or consequences arising from
the use of these notes. This includes, but is not limited to, poor academic performance, penalties, or any other negative
consequences resulting from the application or misuse of the information provided.
, For additional support +27 81 278 3372
QUESTION 1
The price of the 2-year coupon bond (as a percent of par) is:
N = 2; I/YR = 2.496; PMT = 6; FV = 100;
Compute PV = 106.75
The no-arbitrage price of the 2-year coupon bond based on spot (zero-coupon) rates
is:
The 2-year coupon bond's price equals its no-arbitrage value, therefore the bond is
fairly valued.
QUESTION 2
Bond B has a current yield of 8.5%, which is higher than the average yield of similar
bonds (8.0%). This suggests that Bond B is underpriced compared to its peers. If
the bond's yield moves back in line with the peer group yield, its price will rise.
Therefore, buying Bond B now would allow the trader to benefit from the price
increase as the yield normalizes.
QUESTION 3
Ms Koko aims to reduce her portfolio's Macaulay duration from 12 years to 6 years
by selling a portion of her current holdings and reinvesting in shorter-duration bonds.
She has two bond options: Bond Y, a 5-year semiannual-coupon bond with a
Macaulay duration of approximately 5 years, and Bond Z, a 4-year zero-coupon
bond with a Macaulay duration of 4 years.
