Fixed Income Securities

Q1. Given three reasons why the maturity of a bond is important.

1. The term to maturity is important because the yield on a bond depends on it. The shape of the yield curve determines how the term to maturity affects the yield

2. The term to maturity indicates the time period over which the holder of the bond can expect to receive the coupon payments and the number of years before the principal will be paid in full

3. The price of a bond will fluctuate over its life as yields in the market change. The volatility of a bond’s price is dependent on its maturity. More specifically, with all other factors constant, the longer the maturity of a bond, the greater the price volatility resulting from a change in market yields

Q2. Explain whether or not an investor can determine today what the cash flow of a floating-rate bond will be.

Floating-rate bonds are issues where the coupon rate resets periodically based on a general formula equal to the reference rate plus the quoted margin. The reference rate is some index subject to change. The exact change is unknown and uncertain. Thus, an investor cannot determine today what the cash flow of a floating-rate bond will be in the future

Question 3. Suppose that the coupon reset formula for a floating-rate bond is 1-month LIBOR + 220 basis points

a. What is the reference rate?

The reference rate is the 1-month LIBOR

b. What is the quoted margin?

The quoted margin is the 220 basis points (or 2.20%).

c. Suppose on a coupon reset date that 1-month LIBOR is 2.8%. what will the coupon rate be for the period?

2.8%+2.2%=5%

Q4. Calculate for each of the following bonds the price per $1,000 of par value assuming semiannual coupon payments.

Bond | Coupon Rate (%) | Years to Maturity | Required Yield (%) |

A | 8 | 9 | 7 |

B | 9 | 20 | 9 |

C | 6 | 15 | 10 |

D | 0 | 14 | 8 |

Bond | PMT | N | I/Y | PV | Price |

A | 0.04 | 18 | 3.5 | 1.06595 | $1,065.95 |

B | 0.045 | 40 | 4.5 | 1.00000 | $1,000.00 |

C | 0.03...