INV3702 - MAY_JUNE 2018 (1).pdf

INV3702 – Memo – May/June 2018 Examination

Question Answer Explanation
1 2 N = 6 X 2 = 12
I/Y = ?
PV = -R6012
PMT = 0
FV = R10 000
CPT I/Y = 4.33% Semi Annual X 2 = 8.66%
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. = 3.4
PV = ?
PMT = 0.07 X 100 000 = = 3500
FV = R100 000
CPT PV = 102 545.55
4 3 Price Change = D X Change in Yield
Price Change = 8.41 X 0.0025
Price Change = 0.021025 X 100 = 2.10%
5 3 = 1.5% + 3% = 4.5% - Floor = 5% so 5% is the rate
6 4 New coupon rate = reference rate ± quoted margin
7 3 N = 10 X 2 = 20
I/Y = 9. = 4.8%
PV = ?
PMT = 0.08 X 1000 = = 40
FV = 1000
CPT PV = 898.59

N = 5 X 2 = 10
I/Y = ?
PV = -898.59
PMT = 0.08 X 1000 = = 40
FV = 1080
CPT I/Y = 5.9842% X 2 = 11.97%
8 3 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%

The municipal bond is superior