Lecture_2_Questions-Second_Set

Lecture_2_Questions-Second_Set - Lecture 2 Questions-Second...

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Lecture 2 Questions-Second Set 1. An investor wants to measure precisely the difference in yields between 3-day bills and 6-month bills. Suppose that today’s WSJ ask yield (bond-equivalent yield) is reported as 8% for a 3-day bill and 8.2% for a 180-day bill. Comparing these yields directly suggests that somewhat higher yields can be earned by investing for 6 months, rather than 3-days. Is this still true when you take into account the different compounding periods? Please show your work. Answer: Please see lecture 2 notes, ‘measuring the difference in yields between T-bills with different maturities’ formula. Calculate N 2 , when n 1 3 = , n 2 1 8 0 = , N 1 8 % = . N 2 8 1 5 7 % = . . Although 8.157% is smaller than 8.2%, it’s still bigger than the 3-day bill’s yield. 2. What are the three complexities in fixed income security price-yield relationships? Answer: 1) Prices and yields for bonds with different compounding periods are calculated with a change in formulas. Also, yields for bonds with different compounding periods are not directly
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This note was uploaded on 10/16/2011 for the course FIN 353 taught by Professor Cobus during the Spring '08 term at S.F. State.

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Lecture_2_Questions-Second_Set - Lecture 2 Questions-Second...

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