MAF308: Derivatives and Fixed Income Securities - Accounting and Finance Assessment Answer

Assessment Task: Accounting and Finance

Question A1:

Calculate the yield-to-maturity for bond GSBG27 on 3 July 2019 12:30 (4 Marks). Is your answer equal the value in the corresponding column “Yield”, i.e., 1.164%? If it is not, briefly discuss the possible reason(s) why your answer is different from the value of yield in the above table.

Question A2:

Assume 3 months later, i.e., on 3 October 2019 12:30PM, you observe that the prevalent market yield is 4.750% p.a. semiannual compounding, what would be the “Valuation Price” of this bond on 3 October 2019 12:30? (4 Marks) Is your answer $100 for every $100 par value? In the past study, you’ve learnt that when the coupon rate and the yield of a bond are equal and the bond price will be the same as its par value. If your valuation price in this case is not $100 for every $100 par value, is your calculation wrong or the statement wrong? If both your calculation and the statement are correct, how would you reconcile these two? (Maximum 200 words 6 Marks)

Question A3:

Construct a graph for the above bond showing the relationship between bond price (Y- axis or vertical axis) and yield-to-maturity (X-axis or horizontal axis) for a range of yield-to-maturity (annualized) of 0.000% through 8.00% with step size of 0.50%. All yields are annualized and semiannual compounding. Discuss the relationship between bond price and yield-to-maturity.

Question A4:

Compute the duration of the bond on GSBG27 on 3 July 2019 12:30PM. Using graphs to demonstrate the effect of coupon and interest rate (or yield) on duration respectively. Briefly discuss your graph results.

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