Fnce401 Assignment 3

Assignment 3

Instructions

Assignment 3 should be submitted after you have completed Unit 5. This assignment is worth

15 percent of your final grade.

Assignment 3 contains eight problems. The maximum mark for each problem is noted at the beginning of the problem. This assignment has a total of 100 marks.

Read the requirements for each problem and plan your responses carefully. Although your responses should be concise, ensure that you answer each of the required components as completely as possible. If supporting calculations are required, present them in good form.

When you receive your graded assignment, carefully review the comments the marker has made. This review component is an important step in your learning process. If you have any questions or concerns about the evaluation, please contact the Student Support Centre.

Question | Full Marks | Marks Awarded |

1 | 10 | 10 |

2 | 15 | 15 |

3 | 15 | 13 |

4 | 10 | 10 |

5 | 10 | 10 |

6 | 15 | 12 |

7 | 10 | 10 |

8 | 15 | 13 |

Total | 100 | 93% |

Problem 1 (10 marks)

Three years ago, you purchased a bond for $974.69. The bond had three years to maturity, a coupon rate of 8% paid annually, and a face value of $1,000. Each year you reinvested all coupon interest at the prevailing reinvestment rate shown in the table below. Today is the bond's maturity date. What is your realized compound yield on the bond?

Time | Prevailing reinvestment rate |

0 (purchase date) | 6.0% |

1 | 7.2% |

2 | 9.4% |

3 (maturity date) | |

Value at T3=$80×1.072×1.094+$80×1.094+$80+$1,000=$93.82+$87.52+$80.00+$1,000=$1,261.34 

$974.691+yrealized3=$1,261.34

1+yrealized3=1.294094

yrealized=8.9737%

Mark 10/10

Problem 2 (15 marks)

You will be paying $10,000 a year in education expenses at the end of the next two years. Currently the yield curve is flat at 8%.

1. If you want to fully fund and immunize your obligation with a single issue of a zero-coupon bond, what maturity bond must you purchase?...