Task no . 1

Fixed Profits Securities and Markets

Query A. you

Given the next bond:

|starting date |30/09/2011

|maturity date |30/09/2014

|coupon rate |4. 00%

|coupon rate of recurrence |annual

|day count number |act/act

|nominal benefit |100

a) Calculate the price of the security within the 30/09/2011, in case the yield to maturity is usually 5% (NB: Price=PV of future money flows). b) Given the retail price and the yield to maturity of the connect, calculate the three components of the (expected) total return of the investment (if you make investments 100 Euro). c) What will be the price of this connect after one year (on 30/09/2012) if the yield to maturity is 3%? d) If upon 30/09/2012 you decide to sell the bond in the price calculated in the previous problem, what will be the returning of your expenditure? How this differs from your expected go back calculated in (b)? Brief review. Solution

a) Using the pricing formula intended for bonds:

[pic]

b) Three different pieces are:

a. Coupon: holding the bond right up until maturity, the investor will receive three coupons of size 4 Euro, therefore the coupon component will be nC=12 m. Capital gain: it is the difference between the selling price at maturity and the cost at obtain, equal to 100-97. 26= 2 . 74 c. The interest about interest is 0. sixty one, from the pursuing formula:

[pic]

The entire expected go back from this purchase is therefore equal to 12+2. 74+0. 61=15. 35. In percentage terms, the go back is corresponding to 15. thirty-five divided by invested sum (97. 26), minus one particular, or 15. 78%. In annual term the percentage go back will be a third of the period return, we. e. five. 12%.

c) Applying once again the solution used in (a):

[pic]

d) If the bond comes on 30. 09. 2012 at 3% yield to maturity, the realized return of this purchase will be: a. Coupon: the bond has been held for just one year, and so the investor are getting one coupon, equal to four b. The administrative centre gain will be equal to info. 91-97. 26=4. 64 c. No interest on fascination is obtained, because the initial coupon is usually received in the selling time The total realized return with this investment has been 8. 64 Euro, which in turn corresponds to an annual return of 8. 64%. The twelve-monthly return is higher then this expected come back because the second component (capital gain) continues to be higher than expected. The decrease in the (required) yield to maturity with this bond offers caused an appreciation of 4. sixty four Euro in a single year, even though the investor expected a capital gain of two. 74 in three years.

Issue A. a couple of

Suppose that a bond is definitely purchased among coupon intervals. The days between settlement particular date and the next coupon period is 116. There are 183 days in the coupon period. Suppose that the bond purchased has a discount rate of 7. 4% and there are 10 semi-annual coupon repayments remaining. a) What is the dirty price for this connection if a a few. 6% discount rate can be used? b) What is the built up interest just for this bond?

c) What is the clean value?

Solution

The basic pricing method can be used to find the dirty price from the bond. Especially, the dirty price is corresponding to the present benefit of all long term cash moves due to the relationship holder. The current value of each and every cash flow can be calculated inside the table beneath. Both coupon rate and yield to maturity considered in the computation are semi-annual:

|days (from settlemt) |Event |cash circulation |yield to maturity |PV | |-68 |last coupon | | | | |0 |settlement date | | | | |115 |coupon |3. 7 |2. 80%...

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