1

Session 2: Bond Pricing

A. For class discussion.

B.
i) At a YTM of 5.445%, the settlement price is $106. 426.
ii) The percentage change in price is 0.59%.


Valuation Yield Coupon Present
or To Coupon No. of Discount Per Value Face Present SETTLEMENT
Transaction Settlement Maturity Maturity Rate Periods to Rate Period Annuity Value Value PRICE
Date Date Date (%) (%) Maturity Per Period ($) Factor ($) Factor ($)

YTM C t r CPP PVA(r,t) FV PVF(r,t) P0
11/11/05 15/11/05 15/05/13 5.345% 6.50% 15 2.6725% 3.250 12.2257 100 0.6733 107.060
11/11/05 15/11/05 15/05/13 5.445% 6.50% 15 2.7225% 3.250 12.1811 100 0.6684 106.426
Percentage Change -0.59%

C.
i) The settlement price is $128.455.
ii) The settlement price is $127.743.
iii) The percentage change in price is 0.55%.
iv) The low coupon bond is more price sensitive as the % drop in price is larger
for the low coupon bond (-0.59%) than the high coupon bond (-0.55%) given
the same basis point rise in rates.


Valuation Yield Coupon Present
or To Coupon No. of Discount Per Value Face Present SETTLEMENT
Transaction Settlement Maturity Maturity Rate Periods to Rate Period Annuity Value Value PRICE
Date Date Date (%) (%) Maturity Per Period ($) Factor ($) Factor ($)

YTM C t r CPP PVA(r,t) FV PVF(r,t) P0
11/11/05 15/11/05 15/05/13 5.345% 10.00% 15 2.6725% 5.000 12.2257 100 0.6733 128.455
11/11/05 15/11/05 15/05/13 5.445% 10.00% 15 2.7225% 5.000 12.1811 100 0.6684 127.743
Percentage Change -0.55%

D.
i) The settlement price is $104.566.
ii) The settlement price is $104.161.
iii) The percentage change in price is 0.39%.
iv) The long term bond is more price sensitive as the % drop in price is larger for
the long term bond (-0.59%) than the short term bond (-0.39%) given the same
basis point rise in rates.


Valuation Yield Coupon Present
Or To Coupon No. of Discount Per Value Face Present SETTLEMENT
Transaction Settlement Maturity Maturity Rate Periods Rate Period Annuity Value Value PRICE
Date Date Date (%) (%) to Maturity Per Period ($) Factor ($) Factor ($)


2
YTM C t r CPP PVA(r,t) FV PVF(r,t) P
0

11/11/05 15/11/05 15/05/10 5.345% 6.50% 9 2.6725% 3.250 7.9064 100 0.7887 104.566
11/11/05 15/11/05 15/05/10 5.445% 6.50% 9 2.7225% 3.250 7.8878 100 0.7853 104.161
Percentage Change -0.39%

E. If interest rates are expected to rise (fall), I tend to shift funds away from the long (short)
term low (high) coupon bonds towards the short (long) term high (low) coupon bonds to
minimise (maximise) the potential capital loss (gain).