Dr. Sudhakar Raju
FN 6700
ASSIGNMENT 2: QUESTIONS ON FIXED INCOME MARKETS
1. The quotes below are for Treasury Bills:
Days to Maturity
360
BID
4.1300
ASKED
4.1125
ASK YLD
?
What is the Money Market Yield (MMY) and BEY (Bond Equivalent Yield) for this TBill?
2. Suppose you purchase the following Treasury bond in Sept. 2010.
Rate
6½
Maturity
MO/YR
Sept. 40
BID
ASKED
ASK YLD
80:10
80:12
?
What is the Ask Yield on this T-Bond?
3. A 91 day, $1 million T-bill is discounted at $13,119.17. What is the price of this T-bill?
What is the MMY and BEY (Ask Yield) of this T-Bill?
4. Suppose you buy a 9% coupon, 15-year bond today when it is first issued. If interest
rates suddenly rise to 15%, what happens to the value of your bond? Assume annual
compounding. Why?
5. A corporation has 7% coupon annual bonds on the market that have 11 years left to
maturity. If the YTM on these bonds is 8.5%, what is the current bond price?
6. A company’s bonds have a coupon rate of 10.25%, 14 years to maturity, and a current
price of $1,225. What is the YTM? Current yield? Assume annual compounding.
7. TMC issues zero-coupon bonds at a price of $350 per bond. Each bond has a face
value of $1,000 payable at maturity in 10 years. Using semiannual compounding, what
is the yield to maturity of these bonds?
8. TMC zero-coupon bonds referred to above are callable in 5 years at a call price of
$650. Using semiannual compounding, what is the yield to call for these bonds?
9. Dunbar Corporation has semi-annual bonds on the market with 10.50 years to
maturity, a YTM of 10%, and a current price of $860. What must the coupon rate be on
Dunbar’s bonds?
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10. IBM issued 10-year bonds one year ago at a coupon rate of 8.75%. If the YTM on
these bonds is 7.25%, what is the current bond price? Assume semi-annual
compounding.
11. Lexecon issued 12-year semi-annual coupon paying bonds two years ago at a
coupon rate of 9.50%. If these bonds currently sell for 96% of par value, what is the
YTM?
12. A zero-coupon bond with a 10% YTM has 15 years to maturity. Two years later, the
price of the bond remains the same. What is going on here? Assume semi-annual
compounding.
13. Bond X is a premium bond with a 9% coupon, a YTM of 7%, and 15 years to
maturity. Bond Y is a discount bond with a 6% coupon, a YTM of 9%, and also 15 years
to maturity. If interest rates remain unchanged, what do you expect the price of these
bonds to be 1 year from now? In 5 years? In 10 years? In 14 years? In 15 years? What's
going on here? (Assume that these are annual bonds)
14. Consider a 30 year bond paying an annual coupon of $80 and selling at par.
a. Suppose the bond was held to maturity and yields remained unchanged. What is the
YTM on this bond?
b. Suppose that immediately after you purchased the bond, reinvestment rates drop to
5%. You hold the bond for 10 years and then at the end of year 10, you sell the bond.
What is the realized yield (also holding period yield) on the bond?
15. Bonds A and B have 8% coupons and are priced at par. Bond A has 2 years to
maturity, while Bond B has 15 years to maturity. If interest rates suddenly rise by 2
percent, what is the percentage change in the prices of both bonds? If rates were to
suddenly fall by 2% instead what is the percentage change in the prices of both bonds?
Illustrate your answers by graphing bond prices versus YTM. What does this imply about
the interest rate risk of longer term versus shorter term bonds? (Assume that both bonds
are annual bonds).
16. Bond J is a 4 % coupon bond. Bond K is a 10% coupon bond. Both bonds have 10
years to maturity and an YTM of 9 percent. If interest rates suddenly rise by 2%, what is
the percentage price change of these bonds? What if rates suddenly fall by 2% instead?
What does this imply about the interest rate risk of lower-coupon bonds? (Assume that
both bonds are annual bonds).
17. Suppose you buy a 10% coupon, annual bond today for $1,100. The bond has 10
years to maturity. What rate of return do you expect to earn on your investment? Two
years from now, the YTM on your bond has declined by 2.50% and you decide to sell.
What price will your bond sell for? What is the realized yield on your investment?
Compare this yield to the YTM when you first bought the bond. Why are they different?
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18. A portfolio manager pays $98.25 million for $100 million of face value of an 18 year
annual bond that that has a coupon rate of 8%. The first coupon payment will be made
one year from now.
a.) What is the YTM on this bond?
b.) If the annual coupons can be reinvested at a yield of 7.35%, what is the realized yield
on this bond, assuming that the bond is held to maturity?
c.) What is the relationship between YTM, Realized Yields, and Reinvestment Rates?
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