AP/ADMS4504
Assignment #1
Winter 2011
Instructions:
(1)
This assignment is to be done individually.
You must sign and submit
the standard cover page supplied as the last page of this
assignment
.
(2)
This assignment is due at the
start
of class in the week starting
February 8, 2011
.
(3)
This assignment is to be either handwritten or printed out.
Work that is too
difficult to read due to messiness and poor handwriting will receive zero
credit.
You must show your work to receive full credit.
(4)
This assignment has five questions and carries a total mark of 100 points.
(5)
Late assignments will not be accepted whether for technical or any other
reason.
(6)
Decimal places: please keep at least 4 in your calculations and 2 in your
final answers. All interest rates are annual unless otherwise stated.
Question 1
(21 marks)
This question has three independent parts, (a), (b), and (c).
(a) You are given the following information: a 0.5year zerocoupon bond, face
value of $10,000, currently priced at $9,750; a 1year zerocoupon bond, par
value of $10,000, currently valued at $9,325. Assume both zerocoupon bonds
are priced correctly.
(8 marks)
a1) What is the fair price of a 1year Treasury note, face value $1,000,
coupon rate of 4% payable semiannually?
(6 marks)
a2) If the Treasury note is currently trading at a YTM of 5% semiannually
compounded, is it underpriced or
overpriced?
(2 marks)
(b) A mutual fund uses 90day Treasury bill (face value of $100 million), currently
trading at a discount rate of 5%, to enter into a 14day repurchase agreement
with an investment bank, who charges a repo rate of 3% and a haircut of 4%.
Please compute the following quantities:
(6 marks)
b1) The current value of the 90day Treasury bill.
(2 marks)
b2) How much does the mutual fund receive from the investment bank
today?
(2 marks)
b3) How much does the mutual fund needs to pay the investment bank, 14
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AP/ADMS4504
Assignment #1 Winter 2011
days later, to buy back the Treasury bill?
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 Fall '08
 LEE
 Treasury bill, Treasury note

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