L15_wk06_soln - ACST201 Financial Modelling Gail Curry...

Info icon This preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
1 (c) Macquarie University 2015 1 ACST201 Financial Modelling Gail Curry Week 6 DISCOVERING DURATION Consultation Sachi 11 am-1pm Monday E4A 615 Colin 5 pm -6 pm Wednesday E4B 104 Syazreen 10 am-11 am Thursday E4B 104 Poon 12 noon- 1 pm Thursday E4B 104 email address for queries [email protected] (c) Macquarie University 2015 2 (c) Macquarie University 2015 3 About learning “Schools teach you to imitate. If you don’t imitate what the teacher wants you get a bad grade. Here, in college, it was more sophisticated, of course; you were supposed to imitate the teacher in such a way as to convince the teacher you were not imitating.” Robert M Pirsig, “Zen and the Art of Motorcycle Maintenance” (1974) Revision - Weighted average Twenty students sat a test which was marked out of 10. Their results are as follows: Score out of 10: 9 7 6 5 Number of students: 8 7 4 1 NOTE: with NO WEIGHTING the average of the scores is : 9+7+6+5 = 6.75 4 (c) Macquarie University 2015 4 Taking into account the weights where the weights are the number of students achieving these scores: Weighted average of the scores: (9 × 8)+(7 × 7)+(6 × 4)+(5 × 1) = 7.5 (8+7+4+1) (c) Macquarie University 2015 5 (c) Macquarie University 2015 6 Bonds: two types of risk (1) Reinvestment risk : risk that interest rates fall, so coupons must be reinvested at lower rates (2) Interest rate risk : risk that interest rates rise, causing the value (market price) of the investment to fall
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2 (c) Macquarie University 2015 7 n half-years Purchase date Sale date P 1 P 2 +c Outgo (purchase price P 1 ) Income (coupons, interest on reinvested coupons, sale price P 2 ) BOND HOLDING PERIOD c c c …... c c 1 2 n-3 n-2 n-1 n ..... 0 (c) Macquarie University 2015 8 BALANCING INTEREST RATE RISK & REINVESTMENT RISK Suppose you have just purchased a 10-year 8% T- bond, and the current yield is 9% pa (coupon rate & yield are both semi-annual) 10-year 8% T-bond, the current yield is 9% pa What is the bond’s purchase price? Purchase price = 4 a 20 + 100 v 20 at 4.5% = 52.0317 + 41.4643 = $93.496 (per $100 face value) (c) Macquarie University 2015 9 (c) Macquarie University 2015 10 Now suppose interest rates rise immediately, and then remain unchanged indefinitely, so that the reinvestment rate, and the sale yield if you want to sell the bond, are j 2 = 10% (c) Macquarie University 2015 11 What will be your HPY (in j 2 form) if you plan to sell the bond after: (a) 1 year? (b) 5 years? (c) 9 years? The sale price is the present value, at the sale yield rate (j 2 = 10%), of the remaining future cash flows – eighteen coupon payments of $4 each and the maturity amount of $100. Sale price (P) = 4 a 18 + 100 v 18 at 5% = 46.7583 + 41.5521 = $88.310..(per $100 face value) (c) Macquarie University 2015 12 If sell after 1 Year: the bond has nine more year to run.
Image of page 2
3 Each of the two coupons is reinvested, from the date it is received until the sale date, at the rate of j 2 = 10%. The accumulated value of the coupons at sale is: 4 s 2 at 5% = $8.200 Total accumulated value of the bond investment on sale date = accumulated value of re-invested coupons + sale price = 8.200 + 88.310 = $96.510 (c) Macquarie University 2015 13 If sell after 1 Year: the bond has nine more year to run.
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern