Solution 3

# Solution 3 - 4 = 1 13 The ex-coupon price will be at par...

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Fin 448: Fixed-Income Securities Homework Solution 3 Wei Yang 1 Commercial papers (1.1) P = 1 1 + 1 4 4% = 0 . 99 M (1.2) D = 1 4 1 + 1 4 4% = 0 . 247525 DV 01 = D × P 10 4 = 24 . 5074 (1.3) We are now 2 months away from receiving the \$1M face value, so we discount using 2-mo Libor. P = 1 1 + 1 6 4 . 21% = 0 . 993 million (1.4) D = 1 6 1 + 1 6 4 . 21% = 0 . 165505 DV 01 = D × P 10 4 = 16 . 4352 2 Pricing FRN (2.1) The resetting of the spread implies that at future ex-coupon dates, the FRN will be priced at par. The current short-term borrowing cost of Libor + 50 bp for 1- to 9-month commercial papers suggests that the markets discount your ﬁrm’s debt at Libor + 50 bp. Hence, you should oﬀer an FRN paying Libor + 50 bp in order to have it issued at par. 1

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(2.2) At issuance, the 3-month Libor is 4.02%. Hence, in 3 months, the FRN will pay a coupon of 100 × 4 . 02% + 50 bp
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Unformatted text preview: 4 = 1 . 13 The ex-coupon price will be at par, which is implied by the credit-linked feature. For the FRN to be priced at 99.5, we have P = 99 . 5 = 100 + 1 . 13 1 + y 4 y = 6 . 55276% The duration is D = 1 4 1 + y 4 = 0 . 245971 For \$1M face value DV 01 = 1 10 4 × D × P 100 10 6 = 24 . 4741 (2.3) It is now one month after issuance, or 2 months away from the ﬁrst coupon date, at which the payoﬀ will be 100 + 1.13, as shown above. The current price of the FRN is computed by using the 2-mo yield of y = 3.80% + 50 bp. P = 100 + 1 . 13 1 + 3 . 80%+50 bp 6 = 100 . 41 The duration is D = 1 6 1 + y 6 = 0 . 1655 For \$1 million face value DV 01 = 1 10000 D × P 100 10 6 = 16 . 62 2...
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## This note was uploaded on 10/06/2011 for the course FIN 448 taught by Professor Weiyang during the Spring '10 term at Rochester.

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Solution 3 - 4 = 1 13 The ex-coupon price will be at par...

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