FINS2624: Portfolio Management 2023 Term 3 Assignment 1 due Week 2 Tutorial Reflective How would you assess your pre-existing knowledge of portfolio management and topics covered in this course? What are some questions or problems you expect to be able answer/solve after taking this course? (150-200 words) Questions Q1 Consider a zero-coupon bond with a face value of $110, a time-to-maturity of one year and a price of $105. What is its yield-to-maturity? Q2 (Optional) Consider a coupon bond with a face value of $100, a coupon rate of 20%, a time- to-maturity of two years and a price of $130. What is its yield-to-maturity? Hint: Solve numerically using a scientific calculator or Excel. Q3 Consider a coupon bond with a face value of $100, a coupon rate of 20%, a time- to-maturity of three years and a yield-to-maturity of 4% (implying a price of $144.40). a. What would be the holding period return on buying the bond today and selling it in one year’s time if interest rates in one year’s time are such that the bond’s yield-to-maturity is still 4%? b. What would be the holding period return on buying the bond today and selling it in one year’s time if interest rates in one year’s time are such that the bond’s yield-to-maturity is 5%? c. What would be the holding period return on buying the bond today and selling it in one year’s time if interest rates in one year’s time are such that the bond’s yield-to-maturity is 3%? d. Can you think of any reason why the change in holding period return is not symmetric even though the change in yield-to-maturity is, i.e. it is changing by one percent in both question b and c compared to question a (although in different directions)? Q4 Suppose that there is a bank that is offering to lend and/or borrow money at an interest rate of 8% (risk free and regardless of the time-to-maturity of the loan). Further suppose that there is a two-year risk-free coupon bond trading with a face value of $100 and a coupon rate of 20% trading in the market. Price the bond using an explicit no-arbitrage argument. Q5 Suppose that the bond in the previous question is actually trading for $120. Show how you could exploit the mispricing to make an arbitrage profit. Selected end-of-chapter questions (Optional) BKM 14: 3, 4, 8, 9, 13, 31a Marking: To obtain the full credit, you need to attempt the reflective question, Q1, Q3 (parts a, b, and c), Q4, and Q5. To obtain half credit, you need to attempt at least three of the four questions listed previously.
