, INV3702 Assignment 2 (COMPLETE ANSWERS) Semester
1 2025 – DUE April 2025; 100% correct solutions and
explanations.
Question 1
We are asked: Is Bond C overvalued, undervalued, or fairly valued?
We need to compare Bond C’s price to the price implied by zero-coupon bonds
(Bond B and Bond D).
First, let's find the price of Bond C based on the zero-coupon rates.
The zero-coupon yields (given) are:
1 year: 2.350% (Bond B)
2 years: 2.500% (Bond D)
Bond C details:
2 years to maturity
6% coupon per year (i.e., R6 per R100 face value per year)
Pays R6 at year 1, and R106 at year 2 (R6 coupon + R100 principal)
Step 1: Find the discount factors for years 1 and 2:
1 2025 – DUE April 2025; 100% correct solutions and
explanations.
Question 1
We are asked: Is Bond C overvalued, undervalued, or fairly valued?
We need to compare Bond C’s price to the price implied by zero-coupon bonds
(Bond B and Bond D).
First, let's find the price of Bond C based on the zero-coupon rates.
The zero-coupon yields (given) are:
1 year: 2.350% (Bond B)
2 years: 2.500% (Bond D)
Bond C details:
2 years to maturity
6% coupon per year (i.e., R6 per R100 face value per year)
Pays R6 at year 1, and R106 at year 2 (R6 coupon + R100 principal)
Step 1: Find the discount factors for years 1 and 2:
