I’ll provide answers after 5 responses. 1) A bond has a par value of $1,000, a 6% semiannual coupon, and three years to maturity. What’s the percentage change in price of the bond if required yield decreases from 6% to 3% given yield to maturity of 3%, 6%, and 12%? A) 8.55% B) 1.09% C) 4.02% 2) Consider a 6% Treasury note with 1.5 years to maturity. Spot rates (expressed as semiannual yields to maturity) are: 6 months = 5%, 1 year = 6%, 1.5 years = 7%. If the note is selling for $992, what’s the arbitrage profit per bond? A) $13.45 B) $5.45 C) $8.00 3) A $1,000, 5%, 20-year annual-pay bond has a yield of 6.5%. If the yield remains unchanged, how much will the bond value increase over the next three years? A) $13.58 B) $13.62 C) $13.78 4) An analyst observes a 20-year, 8% option-free bond with semiannual coupons. The required semiannual-pay yield to maturity on this bond was 8%, but suddenly it drops to 7.25%. Prior to this sudden change in required yield, what was the price of the bond? A) 92.64 B) 100.00 C) 107.85 5) Treasury spot rates (expressed as semiannual-pay yields to maturity) are as follows: 6 months = 4%, 1 year = 5%, 1.5 years = 6%. A 1.5 year, 4% Treasury note is trading at $965. The arbitrage trade and arbitrage profit are: A) buy the bond, sell the pieces, earn $7.09 per bond B) sell the bond, buy the pieces, earn $7.91 per bond C) sell the bond, buy the pieces, earn $7.09 per bond
1)A - Didn’t quite understand the question 2)B 2)B 4)B 5)A
- A do we need duration calc for this ? 2. B 3. B 4. B 5. A
- A 2. B 3. B 4. B 5. A More info needed for 1?
Damil- is 4 not enough?
- ? A ? 2. B 3. A 4. B 5. A
No more info needed for number #1. You want to calculate the price with the YTM at 3%. And then compare it to the price at 6%. If the coupon is 6% and the YTM is 6%, then we know the price is par.
Damil, any update on the answers?
- The first question isn’t clear, so there could be a few solutions 2. B 3. B 4. C - I suppose, that market react very quickly, so the price should rais. 5. A
Erykus Wrote: ------------------------------------------------------- > 1. The first question isn’t clear, so there could > be a few solutions > 2. B > 3. B > 4. C - I suppose, that market react very quickly, > so the price should rais. > 5. A Concerning #4 - The question asks “prior to the change in yield what is the price?”. I think that’s what is mixing you up here. I agree though, and it’s good that you recognize that if the yield goes down the price will rise. This seems like a question to teach you not to skim through the question too fast.
marjuhrene Wrote: ------------------------------------------------------- > Erykus Wrote: > -------------------------------------------------- > ----- > > 1. The first question isn’t clear, so there > could > > be a few solutions > > 2. B > > 3. B > > 4. C - I suppose, that market react very > quickly, > > so the price should rais. > > 5. A > > Concerning #4 - The question asks “prior to the > change in yield what is the price?”. I think > that’s what is mixing you up here. I agree though, > and it’s good that you recognize that if the yield > goes down the price will rise. > > This seems like a question to teach you not to > skim through the question too fast. FYI, the question is asking for the price prior to the drop in rates. Since Coupon rate=YTM then that would imply the bond was at par value prior to the drop in rates. My answers for the questions are: 1. A (Confusing question) 2. B 3. B 4. B 5. A
A B B B A
Will try and get the answers to these shortly. Can’t remember where I saved them.
1.) A (kind of confusing) 2.) Not sure 3.) B 4.) B 5.) A Thank you for the questions!
Could someone go through the math solving a couple of these, I have a lot of trouble with problems like this.
#2 and #5: use spot rates to discount cash flow, (cpn payments and principal at mty), to compare present value to mkt trading price. buy the less expensive one, sell pieces, vice-versa. rest can be solved with fiancial calc, but have similar methodolgy, discounting cash flow to find prsent value, yield to mty. for # 4 you know bond was trading at par because YTM was equal to cpn