Assignement 1

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Jan 9, 2024

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Assignment 1 ADM 3351 By Yonathan Yirga 300148280 October 3, 2023
Problem 1 a) (1+Spot rate (1)/2 )^2 = (1+r(0.5)/2) *(1+ r(1)/2) = 1.025 * 1.03 -1 = 1.05575 1+ Spot rate(1)/2 = sqrt(1.05575) = 1.027497 Spot rate (1) = 5.4994% b) ((1+R(0.5)/2) * (1+R(1)/2) * (1+R(1.5)/2) ) = (1+ spot(1.5)/2)^3 1.025 * 1.02749 * (1+R(1.5)/2) = 1.0265^3 (1+R(1.5)/2) = 1.0816/1.0532 = 1.02699 R(1.5) = 5.3979% c) d(0.5)= (1+spot(0.5)/2)^-1 = (1.025)^-1 = 0.9756 d(1)= (1+spot(1)/2)^-2 = (1.027497)^-2 = 0.94719 d(1.5)= (1+spot(1.5)/2)^-3 = (1.0265)^-3 = 0.92453 d(2)= (1+spot(2)/2)^-4 = (1.0335)^-4 = 0.87651 Price = 5*d(0.5) + 5*d(1) + 5*d(1.5) + 105*d(2) Price = 5*0.9756 + 5*0.94719 + 5*0.92453 + 105*0.87651 Price = 4.878 + 4.7359 + 4.62265 + 92.03355 = $106.27 Price = $106.27 d) ((1+R(0.5)/2) * (1+R(1)/2) * (1+R(1.5)/2) * (1+R(2)/2 ) = (1+ spot(2)/2)^4 1.025 * 1.03 * 1.02699 * (1+R(2)/2 ) = 1.0335^4 1.084245 * (1+R(2)/2 ) =1.14088 (1+R(2)/2 ) = 1.052235 R(2) = 10.4469% We will use the zero-coupon bond. Price = FV/[(1+R(0.5)/2)+ (1+R(1)/2)+ (1+R(1.5)/2)+ (1+R(2)/2)+ (1+R(2.5)/2) ] 85 = 100/[1.025*1.02749*1.02699*1.052235*(1+R(2.5)/2)] (1+R(2.5)/2)=1.0337146 R(2.5)=6.7429% Problem 2 a) Lets find d(2): d(2)=(1+spot(2)/2)^-4 = 1.041^-4 = 0.851524 Faire price(bond C) = FV*d(2) = $85.1524
b) We solve for this equation (where x is number of bond A and y number of bond B: 102.5x + 103.5y = 100 2.5x + 3.5y = 0 We find x=3.5 and y=-2.5 Buy Number of Bonds: 3.5 Of Bond A Sell Number of Bonds: 2.5 Of Bond B Number of Bonds: Of Bond C Problem 3 a) d(0.5) = (1+spot(0.5)/2)^-1 = (1.015)^-1 = 0.990099 d(1) = (1+spot(1)/2)^-2 = (1.02)^-2 = 0.961169 d(1.5) = (1+spot(1.5)/2)^-3 = 0.928599 Price (bond A) = 102.5*d(0.5) = 101.4851 Price (bond B) = 3.5*d(0.5) + 103.5*d(1) = 102.9463 Price (bond c) = 5*d(0.5) + 5*d(1) + 105*d(1.5) = 107.26369 b) Price (bond A) = 102.5 (1+ ? 2 )^1 101.4851 = 102.5 (1+ ? 2 )^1 YTM(A)= 2% Price (bond B) = 3.5 (1+ ? 2 )^1 + 103.5 (1+ ? 2 )^2 102.9463 = 3.5 (1+ ? 2 )^1 + 103.5 (1+ ? 2 )^2 YTM(B)=3.965% Price (bond c) = 5 (1+ ? 2 )^1 + 5 (1+ ? 2 )^2 + 105 (1+ ? 2 )^3 107.2637 = 5 (1+ ? 2 )^1 + 5 (1+ ? 2 )^2 + 105 (1+ ? 2 )^3 YTM(C) = 4.9175%
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c) Price (bond B) = 103.5*d(1) = 99.4809 on July 31, 2023 d) Price (bond c) = 5*d(1) + 105*d(1.5) = 102.3087 on July 31, 2023 e) Price (bond c) = 105*d(1.5) = 97.5029 on Jan 31, 2024 Problem 4 a) Price (bond A) = ? ? [1 − ( 1 1+ ? 2 ) 2? ] + ? (1+ ? 2 )^2? = 2.5[1-(1/(1+0.035))^12] + 100/[1+0.035]^12 = $946.713 Price (bond B) = $973.3506 Price (bond c) = $1000 Price (bond D) = $1000 Price (bond E) = $1041.5832 Price (bond F) = $1083.16624 b) If YTM>coupon rate, then the price of the bond is less than the face value. If YTM<coupon rate, then the price of the bond is greater than the face value. If YTM=coupon rate, then the price of the bond is the same as the face value. c) As a bond comes to maturity, its price start to converge to its face value. If other things stay constant, the YTM of a bond will stay constant over time.
Problem 5 a) Let x be the number of bonds A, y be the number of bonds B, and z be the bomber of bonds C: Z*105=103 Y*102+5z=3 101X+2y+5z=3 Therefore: z=0.981 , y=-0.0186 , x=-0.01849 So a portfolio composed 0.981 of bond C, short 0.0186 bond B, and short 1.867 bond A will replicate bond D. b) The price of the new portfolio will be: -0.01849*103 0.0186*104.5 + 0.981*109.3 = 103.3748 Since the replica portfolio s price is more than the price of Bond D, there is an arbitrage opportunity by shorting the replica portfolio and buying bond D. c) buy Number of Bonds: 0.0184 Of Bond A buy Number of Bonds: 0.0186 Of Bond B sell Number of Bonds: 0.981 Of Bond C
Statement of Academic Integrity Individual Assignment Checklist & Disclosure Please read the disclosure below following the completion of your assignment. Once you have verified these points, hand in this signed disclosure with your assignment. 1. I acknowledge to have read and understood my responsibility for maintaining academic integrity, as defined by the University of Ottawa s policies and regulations. Furthermore, I understand that any violation of academic integrity may result in strict disciplinary action as outlined in the regulations. 2. If applicable, I have referenced and/or footnoted all ideas, words, or other intellectual property from other sources used in completing this assignment. 3. A proper bibliography is included, which includes acknowledgement of all sources used to complete this assignment. 4. This is the first time that I have submitted this assignment or essay (either partially or entirely) for academic evaluation. 5. I have not utilized unauthorized assistance or aids including but not limited to outsourcing assignment solutions, and unethical use of online services such as artificial intelligence tools and course-sharing websites. Course code Adm 3351 Assignment # 1 Use of Plagiarism Detection Tools No Date of submission October 4, 2023 Name Yonathan Yirga Signature Y.Y.
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