Winter 2010
3. (Q. 7 in B) Bonds A and B are both callable and putable.
Bond A
: market price
of $895, face value of $1,000, 8% coupon rate payable semiannually, 15 years to
maturity, may be first called in 5 years at $1,080, may be first called at par in 6
years, and finally may be first put in 8 years at par.
Bond B
: market price of
$454.65, face value of $500, 8% coupon rate payable semiannually, 10 years to
maturity, may be first called in 4 years at $508, may be first called at par in 7
years, and lastly may be first put in 9 years at par. Calculate (the yield to worst
on Bond A – the yield to worst on Bond B) in basis points.
A) - 22
B) - 11
C) -
7
D) - 25
E)
- 16
Answer B
(We round the answers to the nearest two decimal places in the following.)
Bond A: the YTM is 9.31%, and the yield to the first call, the yield to the
first par call, and the yield to put are 12.07%, 10.40%, and 9.93%,
respectively. So the yield to worst on Bond A is its YTM, 9.31%.
Bond B: the YTM is 9.42%, and the yield to the first call, the yield to the
first par call, and the yield to put are 11.20%, 9.82%, and 9.52%,
respectively. So the yield to worst on Bond B is its YTM, 9.42%.
It follows that (the yield to worst on Bond A – the yield to worst on Bond B)
= 9.31% - 9.42% = - 0.11% or - 11 basis points.
4. (Q. 8 in B) The yield on a discount basis on a Treasury bill is 6.9964%. The
settlement date is June 16 and the maturity date of the Treasury bill is
September 5. Calculate the price of the T-bill per $1 of face value (
please keep at
least six decimal places in your answer
).
A) 0.984064