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C39SM_Tutorial1_solutions.docx

C39SM_Tutorial1_solutions.docx - International Bond and...

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International Bond and Currency Markets C39SM1 Tutorial Problem Set 1 Solutions 1. Credit risk - risk that principal will not be repaid when due (don’t need to talk about coupon as not applicable to Bills). For a UK Treasury Bill, this risk is very small, virtually zero, because the UK government conducts a prudent monetary and fiscal policy that ensures the stability of its securities in the market. 2. 91 day Bill, sells at £98.25p. So over 91 days, £98.25 accumulates to £100, giving a 91day yield of: 100 x 1.75/100% = 1.75%. So the yield over a year is 4 x 1.75 = 7.2%. Note that (100-98.25)/100=1.75 3. A Bill could be traded above par if the general price level was falling (we normally assume prices stable or increasing over time) - for then the Bill can offer a positive real rate of return even when its nominal return is negative. 4. Irredeemable bond - there is no maturity date, by definition. 5. Governments have continuous funding requirements year-by-year, and these can be met more easily if there are in the market bonds of a wide range of maturities - because then in any given year
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