INV3702
Assignment 2 Semester 1 2025
Unique #:
Due Date: 2025
Detailed solutions, explanations, workings
and references.
+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.
Varsity Cube 2025 +27 81 278 3372
Assignment 2 Semester 1 2025
Unique #:
Due Date: 2025
Detailed solutions, explanations, workings
and references.
+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.
Varsity Cube 2025 +27 81 278 3372
