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S4-Bonds

# S4-Bonds - HAAS SCHOOL OF BUSINESS University of California...

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H AAS S CHOOL OF B USINESS University of California at Berkeley UGBA 103 A VINASH V ERMA H OMEWORK 4: B ONDS D UE : J ULY 17, 2009 1. From http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml , we learn that at the close of business on Friday July 10, 2009 , (at t=0), the return on risk free investments of various terms to maturity is as follows: Term to Maturity in Years Rate of Return (%) 1 0.45 2 0.91 3 1.40 4 1.81 1 5 2.22 50 Points Total (i). Use the information above to price a 5 year risk free bond with an annual coupon of 2.625%. 15 Points TTM Rate DF t 1 0.45% 0.995520159 2 0.91% 0.98204545 3 1.40% 0.959149125 4 1.81% 0.930761156 5 2.22% 0.896026011 Σ t DF t 4.7635019 Given Coupon Rate 2.625% M \$1,000 PV(Coupons) 125.04 \$ PV(M) 896.03 \$ P 0 1,021.07 \$ at t=0 (ii). Suppose at t=1, there is a parallel upward shift in the term structure of 50 BPS . Work out the term structure at t=1, and price the bond at t=1. 20 Points TTM Rate DFt 1 0.9500% 0.9905894 2 1.4100% 0.9723854 3 1.9000% 0.9450993 4 2.3100% 0.9126992 Σ t DF t 3.8207733 PV(Coupons) 100.30 \$ PV(M) 912.70 \$ P 1 1,012.99 \$ at t=1 (iii). Work out the one-period holding period return. 15 Points

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S4-Bonds - HAAS SCHOOL OF BUSINESS University of California...

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