AY2011-12 Sem1

QF2101 Tut 3

QF2101 Basic Financial Mathematics Tutorial 3 Basic Problems

1 A 10-year bond with face value $100 pays semi-annual coupons at a nominal rate of 8.4% and will be redeemed at $105. Given that the bond yields 10% convertible semiannually, find the price of the bond. [91.91]

A bond with face value $100 pays coupons semi-annually and is redeemable at par at the end of 10 years, giving a yield of 10% compounded semi-annually. Given that the price of the bond is $112.46, find the annual (nominal) coupon rate. [12% nominal]

A 15-year bond with face value $1000 pays semi-annual coupons at a nominal rate of 10% per annum. Calculate to the nearest integer the price of the bond that yields 9% convertible monthly (Hint: you need to first calculate the semi-annual yield) [ $1067]

A bond with face value $1000 and redeemable at par (i.e. redemption price = 1000) on October 2018 pays coupons at 10% convertible semi-annually and yields 9% convertible semi-annually. Interest payments occur semi-annually on 1 October and 1 April every year. Calculate (i) the price (full) of the bond on 1 April 2016 immediately after the coupon payment (ii) (iii) the price (full) of the bond on 16 June 2016. the quoted price of the bond on 16 June 2016 (Assume that there are 76 days between 1 April 2016 and 16 June 2016 and 183 days between coupon payments) [ (i) $1021.95 (ii) 1040.80 (iii) Accrued interest = 20.765 quoted price = 1020.04]

NG Wee Seng Email: matnws@nus.edu.sg Tel: 65164673

AY2011-12 Sem1

QF2101 Tut 3

A newly offered ten-year bond of face value 100 can be redeemed at 105, with 10% coupon payable semi-annually. The effective annual yield at the time of issue is 11%. (i) (ii) (iii) Calculate the exact effective semi-annual yield Determine the price of the bond at issue date. Suppose that the holder of this bold wishes to sell it immediately after the 10th coupon payment has been effected and the effective annual yield has fallen to 7% thereafter. Find the price at which he can sell the bond. [(i)

1.11 1 (ii) 97.45 (iii) Effective semi-annual yield is 1.07 1 ; 116.57]

A 2-year bond that pays coupons semi-annually at a nominal rate of 4% coupon has a yield to maturity of 4.8% convertible semi-annually. Calculate the price and Macaulays duration of the bond. Hence, find an approximation for the bond price when the yield falls to 4.5%. [(i) 98.492, D =1.941 years; DM = 1.896; P(4.5%) = 99.05 approx. ]

Discussion Problems
The annual worth of a cash flow stream x 0 , x1 ,..., x n is the amount, A for which the cash flow stream 0, A, A,.., , A of the same length is equivalent to x 0 , x1 ,..., x n . Prove that

rP , 1 (1 r ) n

where r is the effective annual rate of interest.

NG Wee Seng Email: matnws@nus.edu.sg Tel: 65164673

AY2011-12 Sem1

QF2101 Tut 3

A cash flow stream x 0 , x1 ,..., x n is replicated indefinitely to form a cyclic stream of infinite length: x 0 , x1 ,..., x n , x0 , x1 ,..., x n ,..... . Let P and A be the present value and annual worth of the finite stream x 0 , x1 ,..., x n and let P be the present value of effective annual rate of interest. (i) Prove that P

x0 , x1 ,..., xn , x0 , x1 ,..., xn ,..... .

Let r be the

P . 1 (1 r ) n1

(ii)

Deduce that A

r (1 (1 r ) n 1 ) P . (Use (i) and the result of the 1 (1 r ) n

preceding question)

By differentiating both sides of the formula

1 y n 1 1 y i 0 with respect to y, prove that for any y (0, 1),

yi

iy i
i 1

y(1 y n ) ny n1 (1 y) . (1 y) 2

An annuity pays $(1 + 2k) at time t = k, k Z+, with the first payment made at t = 1. and the last payment made at t = 30. If the interest rate is 3% compounded continuously, calculate the present value (at t = 0) of this annuity. [537.12]

NG Wee Seng Email: matnws@nus.edu.sg Tel: 65164673