Reference no: EM13932877
Bond Valuation
Greenwich Research Plcissued in 22.11.2012 a 10-year, 3.85% coupon bond with coupons paid semi-annually. The bond issue is rated as A- and has a default spread of 1.65%. The Treasury yield rates are presented in the table below.
Treasury Yield curve
Maturity6-1-2-3-5-7-10-20-30-
month year year year year year year year year
Yield Curve Rates 2.19% 2.49% 2.75% 2.96% 3.10% 3.24% 3.55% 4.62% 5.45%
Calculate:
1.The fair price of the bond.
2.Macaulay and Modified Duration
3.The Duration approximation for different YTM's.
4.Convexity
5.Duration and convexity approximation for different YTM's.
6.Plot for different YTM's the Annual Percentage change in price, the Duration approximation and the Duration with convexity approximation
Hint: A default-free theoretical spot rate curve can be constructed from the observed Treasury yield curve by interpolation method.
Question2(700 Words)
Essay
"Exchange-traded funds (ETFs) are considered a cost-efficient way to access a multiplicity of investment exposures and hence have increased popularity among investors after their first introduction on the New York Stock Exchange in 1993"
(Mateus and Rahmani, 2014)
Critical discuss the existing literature on ETFs focusing on:
1. Replication accuracy (Physical vs. Synthetic ETFs)
2. The role of expense ratios, size and liquidity on tracking errors
Mateusand Rahmani(2014)"Physical versus Synthetic ExchangeTraded Funds. Which One Replicates Better?", Journal of Financial Risk Management, forthcoming
Question 4
Essay
"Exchange-tradedfunds(ETFs)areconsideredacost-efficient way to access a multiplicity of investment exposures and hence have increased popularity among investors after their first introduction on the New York Stock Exchange in 1993" (Mateus and Rahmani, 2014)
Critical discuss the existing literature on ETFs focusing on:
1. Replication accuracy (Physical vs. Synthetic ETFs)
2.The role of expense ratios, size and liquidity on tracking errors
MateusandRahmani(2014)"PhysicalversusSyntheticExchangeTradedFunds.
Which One Replicates Better?", Journal of Financial Risk Management,forthcoming
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Problem regarding the bond valuation
: Greenwich Research Plcissued in 22.11.2012 a 10-year, 3.85% coupon bond with coupons paid semi-annually. The bond issue is rated as A- and has a default spread of 1.65%. The Treasury yield rates are presented in the table below.
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