H3 - HAAS SCHOOL OF BUSINESS University of California at...

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H AAS S CHOOL OF B USINESS University of California at Berkeley UGBA 103 S UMMER 2008 A VINASH V ERMA H OMEWORK 3 1. From http://www.ustreas.gov/offices/domestic-finance/debt-management/interest- rate/yield.shtml , we learn that at the close of business today June 3, 2008 , (at t=0), the return on risk free investments of various terms to maturity is as follows: Term to Maturity in Years Rate of Return (%) 1 2.14 2 2.45 3 2.75 4 2.98 1 5 3.21 50 Points Total (i). Use the information above to price a 5 year risk free bond with an annual coupon of 3.25%. 15 Points (ii). Suppose at t=1, there is a parallel upward shift in the term structure of 25 BPS . Work out the term structure at t=1, and price the bond at t=1. 20 Points (iii). Work out the one-period holding period return. 15 Points 1 Obtained by averaging the three year and five year rates. Page 1 of 2
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H AAS S CHOOL OF B USINESS University of California at Berkeley UGBA 103 S UMMER 2008 A VINASH V ERMA 2. The yield to maturity on a 27-year 10.35% annual coupon bond is 16.65%.
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H3 - HAAS SCHOOL OF BUSINESS University of California at...

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