FIXEDINCOMEMSCINFMI - Knowledge QUIZZ_5

QUIZZ 5
1. Demonstrate that the static spread for a 3-year 9% coupon corporate bond selling
approximately at 107.25 and paying semi-annually, given the following theoretical
zero rate Treasury values equal to 50 basis point ? (4 points)
PERIOD
1
2
3
4
5
6
2.

ZERO RATE %
4
4.2
4.9
5.4
5.7
6.0

Suppose you are given the following information about two callable bonds that can
be called immediately:

BOND ABC
BOND XYZ

Estimated Percentage change in Price if interest rate change by :
- 100 BASIS POINTS
+ 100 BASIS POINTS
+5
-8
+22
-16

You are told that both of these bonds have the same maturity and that the coupon rate
of one bond is 7% and of the other is 13%. Suppose that the yield curve for both issue
is flat at 8%. Based on this information, which bond is the lower coupon bond and
which one is the higher coupon bond? Explain why? (2points)
3. The theoretical value of a non callable bond is $103; the theoretical value of a callable
bond is $101. What is the theoretical value of the call option? (1 point)

4. The current on-the-run yields for the Frogs Corporation are as follows:
Maturity (years)
1
2
3
Year
1
2
3

Spot Rate %
7.500
7.604
7.710

YTM %
7.5
7.6
7.7

Market Price
100
100
100

One-Year
Forward Rate
7.500
7.708
7.922

Assume that each bond is an annual-pay bond. Each bond is trading at par, so its coupon rate
equals its yield to maturity (YTM).





Using the zero rates, what would be the value of an 8.5% option free bond of
this issuer? (2 points)

Using the binomial model, show that if  is assumed to be 10%, the lower 1year forward rate one year from now cannot be 7% . (4 points)
Which of the three following 1-year forward rate would probably lead to a
price of 100 ? 8.52%, 6.944% or 5.53%. Why? Prove it.(3 points)

5. What is meant by price compression? Explain (2 points)
6. Are you enjoying this class? (2points)