INV3702 - OCT_NOV 2016.pdf

INV3702 – Memo – Oct/Nov 2016 Examination

Question Answer Explanation
1 No N = 6 X 2 = 12
Correct I/Y = ?
Solution PV = -R6120
PMT = R0
FV = R10 000
CPT I/Y = 4.18% Semi Annual X 2 = 8.36% (Closest is option 1)
2 3 Inflation adjustments are made semi-annually, Coupon rate is fixed, Yields on TIPS are
good estimates of real rates of interest, Coupon payments are based on inflation
adjusted par values
3 2 N = 30 X 2 = 60
I/Y = 6.8% / 2 = 3.4%
PV = ?
PMT = 0.07 X R100 000 = R70000/2 = R3500
FV = R100 000
CPT PV = R102 545.55
4 3 Decrease in rates = increase in price

Price Change = D X Change in Yield X 100
Price Change = 8.41 X 0.0025 X 100
Price Change = 2.10%
5 3 Coupon rate = 1.5 % + 3.00% = 4.5% - Lowest is the floor of 5%
6 3 Yield Premium decrease meaning lower coupons = discount bond.
7 4 N = 15 X 2 = 30
I/Y = 9. = 4.8%
PV = ?
PMT = 0.08 X R1000 = R = R40
FV = R1000
CPT PV = -874.17
N = 5 X 2 = 10
I/Y = ?
PV = -874.17
PMT = 0.08 X 1000 = R80/ 2 = R40
FV = R1080
CPT I/Y = 6.33% Semi Annual X 2 = 12.67%
8 4 Bond A – Callable anytime one year from today , 10 Years Maturity
Bond B – Non-Callable, 10 Years to maturity

Callable bonds have more reinvestment risk, At lower yields, price volatility is lower
(Call option will decline in value) Negative convexity means lower price increases and
higher price declines.
9 2 The bond with the lowest duration will suffer the least (smallest price decrease) from
an increase in rates. The higher the coupon, higher YTM, and shorter time to maturity,
the lower the duration will be.
10 1 0.07 / (1 – 0.28) X 100 = 9.72% - Municipal = higher rate