Please correct answer and don't use hand rating A fixed income arbitrage hedge fund focuses on Treasury bond trading. Bond A is a ten-yearTreasury bond (Notes) which was issued eight years ago in a low interest environment. BondB is a three-year Treasury bond (Notes) issued one year ago in a high interest environment.The two bonds have two years left to maturity each and the following coupon payments, facevalue and prices.t=1t=2Price at t=0Bond A:$2$2+$100$94.78Bond B:$4 $4+$100$96.43(a)Is there an arbitrage? [2p](b)(c)(d)(e)(f)If yes, find one arbitrage portfolio and determine the price and payoff of it. [3p]Another investor who understands arbitrage trading, asks the sales and trading team ofan investment bank to execute a trade of the two bonds such that he makes $100million at t=1 and $0 at t=2 without paying for it. How does it look like? [2p]When executing this arbitrage trade, investors buy bond B. What is the intuition? It isuseful to compare the yields of the two Treasury bonds. [4p]As arbitrageurs are buying bond B, the price of bond B increases to 98.51. GivenPA=$94.78 and pв=$98.51, is there still an arbitrage? [1p]Given pa=$94.78 and pв=$98.51, what is the one-year yield of a Treasury bond in thismarket? [2p]

(f) Given pA=94.78 and pB=98.51, what is the one-year yield of a Treasury bond in this market? To…

Answered: A fixed income arbitrage hedge fund…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Risks of investing in bonds A security with higher risk will have a higher expected return. A bond’s risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. The curves on the following graph show the prices of two 10% annual coupon bonds at various interest rates. Q1. Based on the graph, which of the following statements is true? a. Neither bond has any interest rate risk. b. The 10-year bond has more interest rate risk. c. Both bonds have equal interest rate risk. d. The 1-year bond has more interest rate risk. Q2. Which type of bonds offer a higher yield? a. Noncallable bonds b. Callable bonds Q3. Answer the following question based on your understanding of interest rate risk and reinvestment risk. True or False: Assuming all else is equal, the shorter a bond’s maturity, the more its price will change in response to a given change in interest rates.…
Spencer did research on the bond market and found the following default-free zero-coupon bonds: Years to Maturity Yield to Maturity 1 3.0% 2 4.0% 3 5.0% 4 6.0% 5 7.0% Bond A B с AE D Using implied rates, what will the price of Bond D be two years from now? $810.55 $831.60 $856.73 $910.28 $1025.03 Par Value $1,000 $1,000 $1,000 $1,000 $1,000
Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Price $983.78 865.89 797.92 732.00 660.24 Required: a. Calculate the forward rate of interest for each year. b. How could you construct a 1-year forward loan beginning in year 3? c. How could you construct a 1-year forward loan beginning in year 4?
A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Suppose the bond issued by Logan Inc. has 5-year maturity with coupon of 12%. 4.1. If the yield to maturity is 10%, compute the bond value. Compute the modified duration of this bond. Use the modified duration to estimate the change in price if the interest rate decreases by 0.50%. 4.2. 4.3.
Consider a $1,000-par-value Bond with the following characteristics: a current market price of $761, 12 years until maturity, and an 8% coupon rate. We want to determine the discount rate that sets the present value of the bond’s expected future cash-flow stream to the bond’s current market price. You are required to determine the discount rate that equates the present value of the bond?
A fixed income hedge fund manager is considering three bonds about to be issued by an automobile manufacturer. The first is a 10-year, 5.5% semi-annual coupon payment bond. The second is a 20-year, 3% semi- annual coupon payment bond. The third one is a perpetual 4% semi- annual coupon payment bond. All bonds are expected to trade at par value at issuance. Calculate the approximate modified duration and approximate convexity for each bond using a 10 bp increase and decrease in the annual yield-to-maturity. Retain accuracy to six decimals per 100 of par value.
Which of the following statements is CORRECT? a. The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates, other things held constant. b. You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline. c. You hold two bonds, a 10-year, zero coupon, issue and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline. d. The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates. e. The time to maturity does not affect…
Spencer did research on the bond market and found the following default-free zero-coupon bonds: Bond Years to Maturity Yield to Maturity Par Value A 1 3.0% $1,000 B 2 4.0% $1,000 C 3 5.0% $1,000 D 4 6.0% $1,000 E 5 7.0% $1,000 Using implied rates, what will the price of Bond D be two years from now? $810.55 $831.60 $856.73 $910.28 $1025.03
The Expectations theory suggests that under certain conditions all bonds outstanding, especially Treasury bonds, must have identical total returns over a 1-year holding period, independently of their final maturity. suppose that today’s interest rate on a 2-year default free zero-coupon Treasury bond that pays $100 at maturity (0i0,2) is 6%. What is today’s price of such a bond (that is, what would you pay to purchase such a bond)?
Assuming markets are operating efficiently, use the current Information to answer the question. Current Market Information: Zero Coupon US Treasury Bond Prices (m=1) Maturity (Yrs). Quoted Price (% Par) 5 86.25 10 68.85 15 20 53.17 31.16 Today you purchase a new 12.0% Coupon bond (semi-annual pmts.) issued by the US Treasury. The bond matures in 20 yrs. You buy the bond today at fair value and over the following 10 years, the Federal Reserve reduces Treasury rates at every maturity by -100bp or -1.0%. What is the realized return on your Eeasury bond investment over the 10 yr holding period, assuming you sell for fair value? Answer: ?
I need help with calculating and entering it into excel.
A BBB-rated corporate bond has a yield to maturity of 9.8%. A U.S. Treasury security has a yield to maturity of 8.4%. These yields are quoted as APRS with semiannual compounding. Both bonds pay semiannual coupons at an annual rate of 9.1% and have five years to maturity. a. What is the price (expressed as a percentage of the face value) of the Treasury bond? b. What is the price (expressed as a percentage of the face value) of the BBB-rated corporate bond? c. What is the credit spread on the BBB bonds? a. What is the price (expressed as a percentage of the face value) of the Treasury bond? The price of the Treasury security as a percentage of face value is ☐ %. (Round to two decimal places.)

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