Reference no: EM132209425
Questions
1. How important is credit risk in the repo market? What does the risk depend on?
2. How do "best effort" and "firm commitment" bond offerings differ?
3. How is liquidity related to bond prices?
4. How do bond yields depend on investors' tax rates?
5.What does the term "seniority" of bonds refer to?
new 7-year 4% government bond is auctioned. e3 billion are offered. The following bids are made:
|
Quantity (emillion)
|
Price bid
|
|
1,000
|
102.9
|
|
700
|
102.7
|
|
400
|
102.6
|
|
450
|
102.5
|
|
600
|
102.4
|
|
550
|
102.3
|
|
1,200
|
102.2
|
a. What is the auction revenue under the uniform pricing rule? b.What is the yield-to-maturity at the uniform price?
c. Assume the term structure of interest rates is flat. What are the Macaulay duration and convexity of the bond?
d. Suppose the interest rate decreases by 0.50%. What is the new price of the bond as approximated using its duration? What is the price when using duration and convexity for the approximation? What is the accurate new price? Interpret your result.
7.A bond offers an annual rate of 4% with annual compounding. What are the equivalent annual rates with semiannual, monthly, and continuous compounding?
8. You are given the following discount factors.
|
Maturity
|
Discount Factor
|
|
1 year
|
0.984
|
|
2 years
|
0.962
|
|
3 years
|
0.935
|
a. Determine the spot rates and the forward rates.
b. How would you characterize the shape of the term structure?
c. Compute the value of a three-year coupon bond with a 2% annually paid coupon.
9. A zero-coupon bond with one year time to maturity trades at a price of 98, a two-year coupon bond with a 3% annual coupon at a price of 98, a three-year coupon bond with a 5% annual coupon at a price of 104, and a three-year zero coupon bond at a price of 90. Does an arbitrage opportunity exist?
10. Assume the yield curve is flat at 3% annually compounded. What is the price of a four-year floating rate bond with a 1% spread?
11. If the term structure is normal, how does the yield-to-maturity of a zero coupon bond differ from a coupon bond of the same maturity?
12. Suppose your investment horizon is five years and the continuously compounded interest rate is flat at 2%. You have the opportunity to invest your money in an over-night deposit account and in a ten-year treasury bond with semi-annual coupon payments of 2%. Which fraction of your portfolio do you invest in the bond to immunize your portfolio?
13. Suppose a two-year bond with a coupon of 5% can be called after one year by an issuer who is able to refinance at the market interest rate. The term structure is flat at 5% and will be at 4.5% or at 5.5% with equal probability one year from now.
a. What is the price of the bond?
b. What is the option-adjusted spread of the bond? c.What is the effective duration of the bond?