Ex. 2 Calculate the combined default risk for company A and B from a combined bond issue of A and B: Company A B Which of the 2 company increased the most its default risk, Bond issue (mn) 80 115 Defa optio 2% 3%
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- 3. A. Rank the following financial securities in order of interest rate risk (1 being the lowest and 3 being the highest).a. 10-year traditional coupon bondb. 10-year zero-coupon bondc. 10-year fully amortizing loan B. Rank the following financial securities in order of reinvestment risk (1 being the lowest and 3 being the highest).d. 10-year traditional coupon bonde. 10-year zero-coupon bondf. 10-year fully amortizing loanINV3 1c If the liquidity preference theory is correct and you believe that the liquidity premium is 1 percent, what is the market expectation of the price that bond #4 will sell for next year? Bond # 1 2 3 4 1 - year strip bond 2- year strip bond 2-year 6% coupon bond 2-year 7% coupon bond Purchase Price for the bond) 950 907.03 1,009.23 1,027.69 Year 1 cash flow 1000 0 60 70 Year 2 cash flow 0 1000 1060 1070 Yield to Maturity 5% 5% 5.50% 5.50%Question 3. A fixed rate bond with notional 1 pays annual coupons of c at times T1, T2, . . . , Tn where Ti+1 = Ti + 1 and notional 1 at time Tn. a) Write down the bond price BFXD c (t) at time t ≤ T0 in terms of ZCBs. b) Suppose t = T0 = 0. The yield of the bond is defined as the value Y such that B FXD c (0) = Xn i=1 c (1 + Y ) i + 1 (1 + Y ) n , that is, the rate at which IRR discounting gives the bond price. By summing a geometric series, show that BFXD c (0) = 1 if and only if Y = c. c) By writing a swap as the difference between a fixed rate bond and a floating rate bond, show that BFXD c (0) = 1 if and only if c = y0[0, Tn]. Remark 1. This exercise shows that the T-year spot swap rate is the bond coupon such that a T-maturity bond has price par, that is 100% of notional.
- Q3) Referring to the two corporate bonds' data at below table, answer the following: If the market interest rate was 10%, what would the bonds prices be? Would you consider both bonds to be selling at a discount, premium, or at par value and why? Explain what it means when a bond is selling at a discount, a premium, or at its par value. Bond A Bond B Maturity Years 20 30 Coupon Rate (Paid Semiannual) 12% 8% Par Value (OMR) 1000 1000The following information about bonds A, B, C, and D are given. Assume that bond prices admit noarbitrage opportunities. What is the convexity of Bond D?Cash Flow at the end ofBond Price Year 1 Year 2 Year 3A 91 100 0 0B 86 0 100 0C 78 0 0 100D ? 5 5 105INV3 P1c Bond # 1 2 3 4 1 - year strip bond 2- year strip bond 2-year 6% coupon bond 2-year 7% coupon bond Purchase Price for the bond) 950 ? ? ? Year 1 cash flow 1000 0 60 70 Year 2 cash flow 0 1000 1060 1070 Yield to Maturity ? ? 5.50% ? If the liquidity preference theory is correct and you believe that the liquidity premium is 1 percent, what is the market expectation of the price that bond #4 will sell for next year?
- Q2) State whether the following statements are true or false: Bond represents a hybrid debt instrument whereas preferred stock is ownership rights. Ahmed bought a bond with OMR (1000) par value at OMR (950), which means a market interest rate is greater than the coupon rate of the bond. One use of the cost of capital is to design a firm’s equity policy. Efficient Market Hypothesis means Securities are normally in equilibrium and are “fairly priced. The market is IN equilibrium when the required rate of return larger than the dividend growth rate.INV3 P1a Bond # 1 2 3 4 1 - year strip bond 2- year strip bond 2-year 6% coupon bond 2-year 7% coupon bond Purchase Price for the bond) 950 ? ? ? Year 1 cash flow 1000 0 60 70 Year 2 cash flow 0 1000 1060 1070 Yield to Maturity ? ? 5.50% ? Fill in the missing pieces from the following table using the Law of One Price. Assume all these bonds have the same risk, the yield curve is flat, and any coupon payments are paid annually.A Treasury bond quoted at 102:14 102:16 has a bid price of _______ and an ask price of _____. a. $102.14, $102.16 b. $1,021.40, $1,021.60 c. $1,020.14, $1,020.16 d. $1,024.37, $1,025.00 e. $1,214.00, $1,216.00
- 3) Answer the below questions for bonds A and B. Bond A 8% 8% 2$100.00 $100.00 $100.00 $104.055 CouponYield to maturity Maturity (years) ParPrice Bond B 9% 8% (a) Calculate the actual price of the bonds for a 100-basis-point (1% annual) increase in interest rates. (b) Using (modified) duration, estimate the price of the bonds for a 100-basis- 5 point (1% annual) increase in interest rates.(c) Explain why your answers in parts (a) and (b) differ.H5. f. (1) What is the yield to maturity on a 10-year, 9% annual coupon, $1,000 par value bond that sells for $887.00? That sells for $1,134.20? What does the fact that a bond sells at a discount or at a premium tell you about the relationship between rd and the bond’s coupon rate? solve in Excel Show proper step by step calculation and explain with detailsQ4 Rank from highest credit risk to lowest risk the following bonds, with the same time to maturity, by their yield to maturity: (Rank: 1 = highest, 4 = lowest) Treasury bond with yield of 5.55 percent _______ IBM bond with yield of 7.49 percent ________ Trump Casino bond with yield of 8.76 percent _______ Banc One bond with a yield of 5.99 percent _________