 # Fixed Income II

Suppose Unibank has outstanding a brand new, annual pay, 8% coupon, 2-year amortizing bond. The amortizing schedule is as follows: End of Year Principal Returned 1 50% 2 50% If the bond traded at a 1% nominal spread to Treasuries what would be the price for this bond, Pamort? Assume the comparable Treasury trades at par and has a 7% coupon. — Any thoughts? I guessed Par reasoning being the nominal spread + the treasury rate = the coupon rate. But I think my reasoning is flawed.

YTM of the amortizing bond will be = 7%+1%=8% Coupon payment = 8 Principal amount = 50 Price = 58/1.08 + 58/1.08^2 = 53.7+49.7 = 103.4

Thunder I agree with what you have done after looking at the problem more I would have used those same calculations. However the correct answer is Par Price = 58/1.08 + 54/1.08^2 the above was the solution provided instead of using a 58, the solution used a 54 for the 2nd periodic payment… and it didn’t explain why…

rouman - I have no clue in that case. Lets wait for Map1, strangeguy, dreary and Pepp to chip in their views … when you guys are on this forum I am usually doozing in my office, catching up on last night’s sleep.

The second part of the equation uses 54 instead of 58 because 50% of the bond was paid back to you, here are the bonds cash flows: Year 1 Coupon: 100 x .08= 8 Year 1 principal: 100 x .5= 50 Total cash flow year 1= 58 Year 2 Coupon: 50(Principal outstanding) x .08= 4 year 2 principal: 50 total cash flow year 2: 54 hope that helps

its amortizing bond so think of it as MBS. if you pay 58 first year. then you pay 8% intrest for second year only ont he remaining balance, which is 50 so 50 x .08 = \$4 hence discount 54 only by 1.08 also the nominal spread statment in the later line is trivial once you know the tresury have coupon of 7.

The second part of the equation uses 54 instead of 58 because 50% of the bond was paid back to you, here are the bonds cash flows: Year 1 Coupon: 100 x .08= 8 Year 1 principal: 100 x .5= 50 Total cash flow year 1= 58 Year 2 Coupon: 50(Principal outstanding) x .08= 4 year 2 principal: 50 total cash flow year 2: 54 hope that helps IT DOES – THANKS. THIS IS A GOOD ONE!

Ah thanks guys! good job pointing out that half the principal was paid in the first period!

What is Pamort?