UGBA 103 Fixed Income Valuation 1A) YTM is 4.75% at time of issuance. YTM is 4.88% at 99 per 100. YTM is 4.62% at 101 per 100. 1B) NTT should have been selling at $915.861M PVpredrop = (47.5/.0475)*(1-(1/((1.0475)^2))) = 88.636M PVpostdrop = ((30/.03)*(1-(1/((1.03)^2))))/(1.03^2) = 198.502M PVfacevalue = 1B/(1.0475)^10 = 628.723M PVpredrop + PVpostdrop + PVfacevalue = 915.861M 2A) Bond A should sell at $1040.55 each. Bond B should sell at $1000 each. Bond C should sell
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Case IV: Arbitrage in the Government Bond Market Fixed income management (EBC4058) Tutor: Micheal Viehs Coordinator: Thomas Post Group C: de Vivo Paolo 6057152 Bing-Jun Zhu 6030493 Honglei Zhao 6051963 04/03/2013 INDEX I INTRODUCTION II BOND MARKET – A snapshot III TWO SYNTHETIC BONDS BUILD THE TWO SYNTHETIC BONDS PRICE OF THE SYNTHETIC BONDS IV HOW TO EXPLOIT THE ARBITRAGE OPPORTUNITY SPECULATING ON POSSIBLE REASONS V THE ADVANTAGES OF CALLABLE BONDS VI CONCLUSIONS VII PROBLEM SET
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Chapter 1 Prices‚ Discount Factors‚ and Arbitrage STARTING WITH COUPON BONDS • Three aspects: In May 2010 the U.S. Treasury sold a bond with – a coupon rate of 2 % and – a maturity date of May 31‚ 2015 – a payment frequency of two a year‚ six months apart s of May 31‚ 2015” • This bond is called “ Coupon rate 9/5/2013 Coupon frequency‚ “s” is for “semi‐annual” L. Wu maturity 2 Cash Flow of the Bond • The unit for bond purchasing is $1‚000. • Suppose that an investor purchases $1m face
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FIXED INCOME SECURITIES Fixed Income can be a very important investment class by which one can diversify his/her portfolio to reduce risk. Putting all your money into equities (read more about equity investment) can give you more returns but it does carry high risk as well. Diversification is a basic concept of financial planning and fixed income products come in handy to help us achieve this objective. Let us see what are the different types of fixed income securities and how they help savvy
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Fixed Income Securities Chapter 2 Basics of Fixed Income Securities Problem Set (light version of the exercises in the text) Q3. You are given the following data on different rates with the same maturity (1.5 years)‚ but quoted on a different basis and different compounding frequencies: • Continuously compounded rate: 2.00% annualized rate • Continuously compounded return on maturity: 3.00% • Annually compounded rate: 2.10% annualized rate • Semi-annually compounded rate: 2.01% annualized
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J.‚ n.d. Street directory. [Online] Available at: http://www.streetdirectory.com/travel_guide/183448/finance/the_role_of_collateral_manager_in_trade_finance.html [Accessed 24 October 2014]. Fabozzi‚ F. J. & Mann‚ S. V.‚ 2005. THE HANDBOOK OF FIXED INCOME ANALYSIS. 7 ed. United States: McGraw-Hill. Appendix Table 1 Table 2 Table 3
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Chapter 1 Questions: 3‚ 4‚ 12‚ 14‚ 15a‚ 15b‚ 16‚ 17‚ 21‚ 23‚ 24‚ 25 3. Who are the major types of issuers of bonds in the United States? The major types of issuers of bonds in the United States are the United States Government and its agencies‚ municipal governments and corporations or Special Purpose Vehicles (SPV). 4. What is the cash flow of a 10-year bond that pays coupon interest semiannually‚ has a coupon rate of 7%‚ and has a par value of $ 100‚000? The periodic cash flow is $3‚500 as
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CHAPTER 1 (Questions are in bold print followed by answers.) 1. What is the cash flow of a 8-year bond that pays coupon interest semiannually‚ has a coupon rate of 6%‚ and has a par value of $100‚000? The principal or par value of a bond is the amount that the issuer agrees to repay the bondholder at the maturity date. The coupon rate multiplied by the principal of the bond provides the dollar amount of the coupon (or annual amount of the interest payment). An 8-year bond with a 6% annual
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Chapter 1: Bond Prices‚ Discount Factors and Arbitrage 1. Use this list of Treasury bond prices as of January 15‚ 2013 (which should be taken as the current date for all the questions below except for question 7) to derive the discount factors for cash flows to be received in 0.5‚ 1‚ 1.5 and 2 years. Bond Price 6.0s of 7/15/13 102-15+ 5.0s of 1/15/14 103-7 3/4 8.0s of 7/15/14 107-24 4.0s of 1/15/15 100-23 1/2 Answer: (a) To find d(0.5) The equation from the 6.0s of 15 July
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ANSWERS TO QUESTIONS FOR CHAPTER 1 (Questions are in bold print followed by answers.) 2. What is meant by a mortgage-backed security? A mortgage-backed security is a security backed by one or more mortgage loans. Like a bond that is callable‚ a mortgage-backed security allows the investor to grant the borrower an option. 4. What is the cash flow of a 10-year bond that pays coupon interest semiannually‚ has a coupon rate of 7%‚ and has a par value of $100‚000? The principal or par
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