Question Details

(solution) Suppose that the price of discount (zero coupon) bonds maturing


       Suppose that the price of discount (zero coupon) bonds maturing in years 1, 2, 3, 4, and 5 are given (respectively) by

                    

Price

Time to Maturity

940

1

870

2

800

3

715

4

 630

5


Consider the following risk-free investments. Which is best?

1

2

3

4

5

Investment A

-40

20

15

10

5

1

Investment B

-10

1

5

10

15

20

2.         Three zero coupon risk-free discount bonds of one, two and three year term to maturity are selling for, respectively, $950, $890 and $800. What would be the selling price today of a 10% coupon bond of 3 year maturity (maturity value $1,000)?

3.         Consider a coupon bond, period t = 0 price $900, with payments:

       1      2       3

          50     50     1050

              Discount (zero coupon) bonds of 1, 2 and 3 years maturity (all with maturity value of $1000) sell for respectively, 960, 900, 820 dollars. Is this coupon bond properly priced? If not, design an arbitrage argument to profit by the mispricing.

  • The prices of discount bonds (all with maturity value of $1,000) maturing in years 1, 2, 3, 4, 5 are given below.

          Price

Time to Maturity

920

1

860

2

790

3

700

4

600

5

What is the yield to maturity on a risk-free 5% bond due in 5 years (also with maturity value of $1,000)?

Part 2: Empirical Problem

Inquiry into the Term Structure of Interest rates using US Government Bond Data


  • Download the data on prices and coupon rates for 6 government bonds maturing in consecutive six-month intervals. The first payment of each of these bonds should come in approximately 6 months. For example, if today?s date is March 2nd, 2016, the first bond should mature on August 31st, 2016, the second on February 28th of 2017, and so on. [1]

Use WSJ website to download bond quotes:


http://www.wsj.com/mdc/public/page/2_3020-treasury.html

  • Convert price quotes into the actual prices (multiply by 10).
  • Convert annual coupon rates into the actual semi-annual coupons, expressed in dollars.
  • Show the cash flow table (time line) for your bonds. This table should organize each payment of each bond according to the time when it will be paid.
  • Using the same bootstrapping method as in the example on pages 8--10 of your Review of Bond Concepts handout, calculate the first six rates of the term structure of interest rates.
    • Show equations which you used to find each of the six rates with the data plugged into them (use Insert ? Equation in Word to type your equations).
    • Present annualized rates.

  • Using Excel Chart menu, ?draw? the graph of the term structure: time on the horizontal axis, corresponding term structure rates on the vertical axis. Is it increasing or decreasing?

  1. Briefly explain your findings: Comment on the implications of the observed term structure for the economic conditions as perceived by market participants.

In the report for the second empirical part of this LE, show price conversion (the actual price of the bond for the actual $1000 of face value), coupon calculations (i.e. from the coupon rate to the dollar amount), cash flow table (i.e time line), all your calculations for the term structure rates, graph of the term structure and explanations. Report (including all equations) should be typed.


[1] Notice that bonds that mature on March 15th and September 15th of any year are not a good choice here since all of them will pay coupons on March 15th 2016 (i.e. 13 days from now and not six months).



1. PART 1: THEORETICAL PROBLEMS

 

Suppose that the price of discount (zero coupon) bonds maturing in years 1, 2, 3,

 

4, and 5 are given (respectively) by

 

Price Time to Maturity 940

 

870

 

800

 

715

 

630 1

 

2

 

3

 

4

 

5 Consider the following risk-free investments. Which is best?

 

T=0 1 2 3 4 5 Investment A -40 20 15 10 5 1 Investment B -10 1 5 10 15 20 2. Three zero coupon risk-free discount bonds of one, two and three year term to

 

maturity are selling for, respectively, $950, $890 and $800. What would be the

 

selling price today of a 10% coupon bond of 3 year maturity (maturity value

 

$1,000)? 3. Consider a coupon bond, period t = 0 price $900, with payments:

 

t=0 1 2 50 50 3

 

1050 Discount (zero coupon) bonds of 1, 2 and 3 years maturity (all with maturity

 

value of $1000) sell for respectively, 960, 900, 820 dollars. Is this coupon

 

bond properly priced? If not, design an arbitrage argument to profit by the

 

mispricing. 4. The prices of discount bonds (all with maturity value of $1,000) maturing in years

 

1, 2, 3, 4, 5 are given below. Price Time to Maturity

 

920

 

860

 

790

 

700

 

600 1

 

2

 

3

 

4

 

5 What is the yield to maturity on a risk-free 5% bond due in 5 years (also with

 

maturity value of $1,000)? Part 2: Empirical Problem

 

INQUIRY INTO THE TERM STRUCTURE OF INTEREST RATES USING US GOVERNMENT

 

BOND DATA

 

1. Download the data on prices and coupon rates for 6 government bonds maturing

 

in consecutive six-month intervals. The first payment of each of these bonds

 

should come in approximately 6 months. For example, if today?s date is March

 

2nd, 2016, the first bond should mature on August 31st, 2016, the second on

 

February 28th of 2017, and so on. 1

 

Use WSJ website to download bond quotes:

 

http://www.wsj.com/mdc/public/page/2_3020-treasury.html

 

2. Convert price quotes into the actual prices (multiply by 10).

 

3. Convert annual coupon rates into the actual semi-annual coupons, expressed in

 

dollars.

 

4. Show the cash flow table (time line) for your bonds. This table should organize

 

each payment of each bond according to the time when it will be paid.

 

5. Using the same bootstrapping method as in the example on pages 8--10 of your

 

Review of Bond Concepts handout, calculate the first six rates of the term

 

structure of interest rates.

 

1 Notice that bonds that mature on March 15th and September 15th of any year are not a

 

good choice here since all of them will pay coupons on March 15th 2016 (i.e. 13 days

 

from now and not six months). a. Show equations which you used to find each of the six rates with

 

the data plugged into them (use Insert ? Equation in Word to type

 

your equations).

 

b. Present annualized rates.

 

6. Using Excel Chart menu, ?draw? the graph of the term structure: time on the

 

horizontal axis, corresponding term structure rates on the vertical axis. Is it

 

increasing or decreasing?

 

7. Briefly explain your findings: Comment on the implications of the observed term

 

structure for the economic conditions as perceived by market participants.

 

In the report for the second empirical part of this LE, show price conversion (the actual

 

price of the bond for the actual $1000 of face value), coupon calculations (i.e. from the

 

coupon rate to the dollar amount), cash flow table (i.e time line), all your calculations for

 

the term structure rates, graph of the term structure and explanations. Report (including

 

all equations) should be typed.

 


Solution details:
STATUS
Answered
QUALITY
Approved
ANSWER RATING

This question was answered on: Jan 30, 2021

PRICE: $15

Solution~0001000714.zip (25.37 KB)

Buy this answer for only: $15

This attachment is locked

We have a ready expert answer for this paper which you can use for in-depth understanding, research editing or paraphrasing. You can buy it or order for a fresh, original and plagiarism-free solution (Deadline assured. Flexible pricing. TurnItIn Report provided)

Pay using PayPal (No PayPal account Required) or your credit card . All your purchases are securely protected by .
SiteLock

About this Question

STATUS

Answered

QUALITY

Approved

DATE ANSWERED

Jan 30, 2021

EXPERT

Tutor

ANSWER RATING

GET INSTANT HELP/h4>

We have top-notch tutors who can do your essay/homework for you at a reasonable cost and then you can simply use that essay as a template to build your own arguments.

You can also use these solutions:

  • As a reference for in-depth understanding of the subject.
  • As a source of ideas / reasoning for your own research (if properly referenced)
  • For editing and paraphrasing (check your institution's definition of plagiarism and recommended paraphrase).
This we believe is a better way of understanding a problem and makes use of the efficiency of time of the student.

NEW ASSIGNMENT HELP?

Order New Solution. Quick Turnaround

Click on the button below in order to Order for a New, Original and High-Quality Essay Solutions. New orders are original solutions and precise to your writing instruction requirements. Place a New Order using the button below.

WE GUARANTEE, THAT YOUR PAPER WILL BE WRITTEN FROM SCRATCH AND WITHIN A DEADLINE.

Order Now