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# Leadership Essay

457 words - 2 pages

FM 430 HOMEWORK MRIYA UDANI
ASSIGNMENT 2 LSE ID: 201136417

Q1)

FACE VALUE = \$100

PRICE OF A ZERO COUPON BOND (P) = FV1+rt
=1001+0.063

=1001.191016

= \$83.96

YTM = FVP1n– 1

YTM = 10083.9613– 1

YTM = 1.06 – 1 = 6%

PRICE OF A BOND WITH COUPON RATE 5% AND 2 YEARS TO MATURITY:

ANNUAL COUPON PAYMENT (C) = 5%*1001

C = 5

PRICE = C1+R1+ 100+C1+R22

= 51+0.05+100+51+0.0552

= 4.7619 + 94.3375

= \$99.09

YTM OF A COUPON BOND WITH PRICE \$99.09, PAR VALUE \$100, NO.OF YEARS TO MATURITY: 2 AND ANNUAL COUPON PAYMENT = 5

P = CPN*1y1-11+yn+FV1+yn
...view middle of the document...

OF YEARS TO MATURITY: 4 AND ANNUAL COUPON PAYMENT = 9

USING EXCEL SPREADSHEET, y=6%

THEREFORE, YTM = 6% AND THE BOND IS SELLING AT A PREMIUM.

Q2)
ASSUMPTION: THE BONDS HAVE A PAR VALUE OF \$100.

PRICES OF BONDS A, B AND C:

BOND A IS A ZERO COUPON BOND, THUS PRICE = FV1+rt

= 1001+0.051

PRICE = \$95.23

PRICE OF BOND B:

CALCULATING USING FORMULA:
P = CPN*1y1-11+yn+FV1+yn

P=5*10.05851-11.05852+1001.05852

PRICE=\$98.44

PRICE OF BOND C:

CALCULATING USING FORMULA:
P = CPN*1y1-11+yn+FV1+yn

P=7*10.06251-11.06252+1001.06252

PRICE = \$101.37

Yes, an arbitrage is possible.
Creating a synthetic replicated portfolio of bonds A and B and equating them with the cash flows of Bond C, we have

YEAR | BONDS | COUPON RATE | PRICE |
1 | A | 0% | \$95.23 |
2 | B | 5% | \$98.44 |

Equating cash flows:
Let x be the units of bond A and y be the units of bond B:
100x + 5y = 7
105y = 107
Thus, x = 0.019 and y=1.019,

Therefore, Bond A = 0.019*\$95.23 = \$1.80
Bond B = 1.019*\$98.44 = \$100.31

Portfolio for (Bond A + Bond B)= 102.11

SINCE THE BOND C IS TRADING AT \$101.37, THEREFORE THE STRATEGY WOULD BE TO BUY BOND C AND SELL ITS SYNTHETIC PORTFOLIO FOR \$102.11.

Q3. (a), (c), and (d) are correct.

Q4. ASSUME THE FACE VALUE OF THE BOND TO BE \$100.

(a) PRICE OF BOND:

CALCULATING USING FORMULA:

PRICE = C1+R1+ C1+R22…+100+C1+RTT

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