Week 11 Q&A and others

Week 11 Q&A and others - Which of the following two...

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Unformatted text preview: Which of the following two bonds has the longer duration? A: A bond with annual coupon rate of 10% and 20 years to maturity B: A 16‐year zero‐coupon bond Answer: The total coupon value is $2,000 and the average maturity of the coupon is less than 10. The face value is$1,000 and its duration is 20. Equal average of 20 and 10 is 15, and the duration would be less than 15. Note: When the coupon rate is 5%, the duration of a 20 year annual coupon bond would be 15 when its YTM is zero. Hence, when the coupon rate is higher than 5%, its duration would be less than 15. Why some bonds are deeply discounted? This question arises from the relationship between duration and time to maturity when bonds are deeply discounted. Answer: Example 1: A company like ABC Learning Centre which starts off as a AAA company and did not do well later. Its bonds become junk bonds, the yields on those bonds increase so deep discounting. Example 2: A country like Greece which has a very good bond rating few ago when it issued its bond. Recently, there were scandals regarding their swap activities and the underlying problems of Greece were uncovered. It bonds were reclassified as Junk Bonds, the yields on those bonds increase so deep discounting. Rate Anticipation Swap: Why buy the short duration bonds? Why not simply sell the long duration bonds when you expect the yield to increase? Answer: If you expect RBA to increase interest at the August meeting, you would e.g., sell the 10‐ year bonds now, get the proceeds and put the funds in a interest‐earning account, which is equivalent to buying a short duration bond. The bond that would give you the best interest or yield would be the yield on a 60‐80 day treasury bill or the 90‐day bank bills (BAB) in Australia. Exotic Options: Read P701‐4. Focus on the definition (description) of each exotic option Adjustments in option contract terms: P675‐6 for stock splits and when stock pays stock dividends instead of cash dividends. E.g., 2‐for‐1 stock split, double the underlying shares from 100 to 200 and reducing the exercise price from X to X/2. CBOE minimum tick and strike prices for stock options: Minimum tick for stock options whose value is below $3, the minimum tick is $0.05 or $5 per contract. For other stock options, the minimum tick is $0.10 or $10 per contract. For strike prices below $25, they are $2.50 apart. For strike prices between $25 and $200, they are $5 apart. For strike prices above $200, they are $10 apart. See the CBOE website http://www.cboe.com/products/EquityOptionSpecs.aspx . ...
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This note was uploaded on 01/24/2011 for the course FINS 5513 taught by Professor Wangjianxin during the Three '10 term at University of New South Wales.

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