4500.3 - Practice Problems Fina 4500: International Finance...

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Unformatted text preview: Practice Problems Fina 4500: International Finance Fall 2011 page 1 Problem Set 3: Yield curves and arbitrage in bonds 1. A bond is offered with face value of $1,000, a 10% coupon rate with semi-annual payments, and twenty years to maturity. If the market interest rate is 12%, what should be the price? 2. If the market interest rate rises to 15%, what will be the new price for the bond in question 1? 3. If the market interest rate drops to 9% instead, what will be the new price for the bond in question 1? 4. If the market interest rate changes to 8%, what will be the new price for the bond in question 1? 5. If the market interest rate rises to 10%, what will be the new price for the bond in question 1? Note that when the market rate equals the coupon rate, the price equals the face value. 6. If the market interest rate drops to 6% instead, what will be the new price for the bond in question 1? 7. If the market interest rate changes to 17%, what will be the new price for the bond in question 1? 8. If the market interest rate rises to 18%, what will be the new price for the bond in question 1? 9. If the market interest rate drops to 16% instead, what will be the new price for the bond in question 1? In the first three problems the market rate varied around 12%. 1 In the next three problems it varied around 8% (changing by 2% both up and down). In the final three it varied around 17% (changing by 1% each way). Note that the capital gain from a decrease of x% in the market interest rate would be greater that the capital loss from an increase of x%. This relationship is known as convexity . 10. A bond is offered with face value of $1,000, a 10% coupon rate with semi-annual payments, and ten years to maturity. If the market interest rate is 12%, what should be the price? 11. If the market interest rate rises to 15%, what will be the new price for the bond in question 10? 1 It changed by 3%, first going up from 12% to 15% and then going down from 12% to 9%. Practice Problems Fina 4500: International Finance Fall 2011 page 2 12. If the market interest rate drops to 9% instead, what will be the new price for the bond in question 10? 13. If the market interest rate changes to 8%, what will be the new price for the bond in question 10? 14. If the market interest rate rises to 10%, what will be the new price for the bond in question 10? 15. If the market interest rate drops to 6% instead, what will be the new price for the bond in question 10? 16. If the market interest rate changes to 17%, what will be the new price for the bond in question 10? 17. If the market interest rate rises to 18%, what will be the new price for the bond in question 10? 18. If the market interest rate drops to 16% instead, what will be the new price for the bond in question 10?...
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4500.3 - Practice Problems Fina 4500: International Finance...

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