Financial Market product

mayankmundhra30
Good Student
Posts: 23
Joined: Sat Jun 25, 2016 8:13 am

Financial Market product

Postby mayankmundhra30 » Sat Sep 03, 2016 6:20 am

1) A US corporate bond is trading on NASDAQ with face value $ 1000, coupon rate of 6% and coupon dates 31-Dec and 30-Jun of every year. The bond matures on 31-Dec-2014 and today is 01-Oct-2013. Compute the dirty price of the bond if yield is 8%.
Choose one answer.
a. $987.62 Incorrect
b. $989.87 Incorrect
c. $982.79 Correct
d. $992.67 Incorrect
While solving i use the formula Dirty price=Quoted price+ Accrued interest
Quoted price obtained was around $963 and accrued price $15. Please solve using quoted price and accrued interest.

2) A and B enter into a fixed for floating swap for 10 years with semi-annual payments. Compute the discount factor for 1 year given the following fixed rate:
T6months: 4.0%
T12months: 4.8%
T18months: 5.6%
Choose one answer.
a. 1.96% Incorrect
b. 4.54% Correct
c. 2.87% Incorrect
d. 3.24% Incorrect
The correct answer is B
Discount rate for 6 months: 100/ [100+(4/2)] = 0.9804 or 1.96%
Discount rate for 12 months: 100/ {[100+(4.8/2)] + [(4.8/2)/ (1+1.96%)]} = 0.9546 or 4.54%.
Correct

How did you get the formula? please explain.

3) Identify the correct statement:
Choose one answer.
a. A parallel shift in yield curve leads to change in slope of the yield curve. Incorrect
b. A non-parallel shift in yield curve leads to yields changing in same direction and same amount. Incorrect
c. Butterfly shift in yield curve refers to change in curvature of the yield curve. Correct
d. Twists refer to change in yield curve when the slope is normal. Incorrect
The correct answer is C
(a) A parallel shift in yield curve does not lead to change in slope of the yield curve. (b) A non-parallel shift in yield curve may not lead to yields changing in same direction and same amount. (d) Twists refer to change in yield curve when the slope is flatter or steeper.

Explain the third option in details.

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: Financial Market product

Postby edupristine » Fri Sep 09, 2016 6:04 am

Hi Mayank

2- Solution for second Question is
D(Discount factor)= 100/(100+P)^n
= 100/(100+4/2)^1 (4/2 because payment is semi-annual )
=0.9804
=100%-98.04%
=1.96%
Discount rate for 12 months= 100/ {[100+(4.8/2)]^1 + [(4.8/2)/ (1+1.96%)]} (for the d of 1st six months and next six months period of the)
= 0.9546
=100%-95.46%
=4.54%

Solution 2: Here the change in yield is taken as 0.5% because basis of payment is given semi-annually(semi-annual coupon of 6%), So the yield become half of the original yield given i.e 1%/2 = 0.5%

3. Explanation for third Question is
In butterfly shifts, the magnitude of change in the yield of short-term (BIL) and long-term (TLT) bonds is higher or lower than the magnitude of change for intermediate-term (IEF) bonds. so Butterfly shift in yield curve refers to change in curvature of the yield curve.


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