X15_wk05 - MACQUARIE UNIVERSITY Faculty of Business and...

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© 2015 Dept of Applied Finance and Actuarial Studies, Macquarie University (All rights reserved) Week 05 1 MACQUARIE UNIVERSITY Faculty of Business and Economics ACST201: Financial Modelling WORKSHOP PROBLEMS (Week 05) HORIZON ANALYSIS: BONDS & BILLS 1. A 10% 5-year Treasury bond is bought at $92.640 (market yield-to-maturity is 12%). Assuming a reinvestment rate of j 2 = 10%, what is the holding period yield if the bond is sold after three years, when the market yield is 9%? 2. How sensitive is the holding period yield (HPY) in Problem 1 to a change in the sale yield? (Try an increase of ten basis points in j 2 .) 3. What annualized yield would be earned over a 15-day holding period if a $500,000 180-day bank bill was bought at a yield of 13.00%, and assumed to be sold at 12.90%? 4. How sensitive is the holding period yield (HPY) in Problem 3 to an increase of five basis points in the sale yield? 5. Split the dollar yield (ie the difference between the sale price and the purchase price) in Problem 3 into: (a) interest component; and (b) capital gain/loss component.
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© 2015 Dept of Applied Finance and Actuarial Studies, Macquarie University (All rights reserved) Week 05 2 MACQUARIE UNIVERSITY Division of Economic and Financial Studies ACST201: Financial Modelling SAMPLE SOLUTIONS TO WORKSHOP PROBLEMS (Week 5) HORIZON ANALYSIS: BONDS & BILLS 1. $P $92.640 $5 $5 $5 $5 $5 $5 |____________|____________|____________|____________|____________|____________| 0 1 2 3 4 5 6 ←ίίίίίίίίίίίίίίί 3 years ίίίίίίίίίίίίίίίί→ When this 5-year 10% T-bond is sold after 3 years, it will then be a 2-year 10% T-bond, so its sale price will be the present vale (at the sale yield, j 2 = 9%) of the remaining future cash flows (four half-yearly coupons of $5 each, plus the maturity amount of $100).
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