Fin 448: Fixed-Income Securities
Homework 2
Wei Yang
Assigned: Apr 7
Due: Apr 14
Each problem counts as 10 points.
1
Quoting T-bills
T-bills have a special convention for quoting the prices.
quote =
100 price 360
100
d
Here, d is the maturity measured in
Fin 448: Fixed-Income Securities
Homework Solution 8
Wei Yang
Each problem counts as 10 points.
1
Default correlation and CDO
(1.1)
Total payo
2%
100
6%
150
92%
200
Price
Yield
Senior
100
140
140
139.2
57.47
(1.2) The value of the senior tranche decrease
Fin 448: Fixed-Income Securities
Homework Solution 7
Wei Yang
1
Risk-neutral pricing
(1.1)
800 = 9001 + 60(1 1 )
900 = 10002 + 120(1 2 )
1 = 0.880952
2 = 0.886364
(1.2) The senior bond gets $100 at the end of year 2, no matter which state
realizes. With a
Fin 448: Fixed-Income Securities
Homework Solution 6
Wei Yang
1
Interest rate swap
(1.1) Since it is immediately after an exchange, the FRN will trade at par. The
value of the oating rate side is thus $100M.
(1.2) The xed rate side is a 3.5-year bond payi
Fin 448: Fixed-Income Securities
Homework Solution 5
Wei Yang
1
FRA and Eurodollar futures
(1.1) We will deposit or lend, so we will sell FRA.
(1.2)
(1 +
l6
f6v12
)(1 +
) = 1 + l12
2
2
f6v12 = 2.443%
(1.3) The contract gives the seller an equivalent payo
Fin 448: Fixed-Income Securities
Homework Solution 4
Wei Yang
1
Spread trade using repos
(1.1) Both are par bonds. Per $1 million face value, we have
Ptr = 1 M,
Pco = 1 M,
DV 01tr = 449.129
DV 01co = 437.603
(1.2) To match DV 01 for a $1M face value short
Fin 448: Fixed-Income Securities
Homework Solution 3
Wei Yang
1
Commercial papers
(1.1)
P=
1
= 0.99 M
1
1 + 4 4%
(1.2)
D=
1
1
4
1
+ 4 4%
DV 01 =
= 0.247525
DP
= 24.5074
104
(1.3) We are now 2 months away from receiving the $1M face value, so we
discount u
Fin 448: Fixed-Income Securities
Homework Solution 2
Wei Yang
1
Quoting T-bills
(1.1)
quote =
100 98 2
= 4%
100
1
(1.2)
yield =
2
100
2
1 = 4.08%
98
1
Basis point value
(2.1) Note that we are investing $100M. This is not the face value.
D5 = 4.45806 P =
Fin 448: Fixed-Income Securities
Homework 8
Wei Yang
Assigned: May 26
Due: June 2
If you submit early, I will send you the solution early
Each problem counts as 10 points.
1
Default correlation and CDO
In order for a CDO to produce a highly rated senior t
Fin 448: Fixed-Income Securities
Homework 7
Wei Yang
Assigned: May 19
Due: May 26
Each problem counts as 10 points.
1
Risk-neutral pricing
The total assets of rm XYZ have a current value of $800. At the end of year 1, the value
of the assets may go up to
Fin 448: Fixed-Income Securities
Homework 6
Wei Yang
Assigned: May 12
Due: May 19
Each problem counts as 10 points.
1
Interest rate swap
You bought a 5-year swap with a notional of $100M, which exchanges Libor with 4.5% xed
interest rate semi-annually. On
Fin 448: Fixed-Income Securities
Homework 5
Wei Yang
Assigned: May 5
Due: May 12
Each problem counts as 10 points.
1
FRA and Eurodollar futures
You will receive from a customer a payment of $1M in 6 months, to be deposited for 6
months in a London bank, w
Fin 448: Fixed-Income Securities
Homework 4
Wei Yang
Assigned: Apr 21
Due: Apr 28
Each problem counts as 10 points.
1
Spread trade using repos
You are speculating that the spread between a corporate bond yield and the Treasury yield
will narrow over the n
Fin 448: Fixed-Income Securities
Homework 3
Wei Yang
Assigned: Apr 14
Due: Apr 21
Each problem counts as 10 points.
1
Commercial papers
Commercial papers are short-term corporate debts in the form of zero-coupon bonds with
maturities from 1 month to 9 mon
Fin 448: Fixed-Income Securities Homework 1
Wei Yang Assigned: Mar 31 Due: Apr 7
Each problem counts as 10 points.
1
Bootstrapping
In this problem we extract zero yields from coupon bond prices through a basic and intuitive approach called "bootstrapping"