EC3314 Financial Economics Spring 2015

Vinay Nundlall
Spring Problem Set 1
Preliminary:
Read the supplementary notes on Discounting, Net Present Value and
Annuity.
Question 1
a) Distinguish between a Foreign Bond and a Eurobond.
What are the following in the Bond Market:
Bulldog, Samurai, Maple, Yankee, Matilda?
Sushi?
Dim Sum?
b) What is a junk bond? What is so attractive with junk bonds?
c) In discriminant analysis, what type of ratings would credit rating
agencies give to a firm that has a Z-Score that lies well below the cutoff score? And if the Z-Score lies well above the cut-off?
d) What is a basis point in interest rates? Write 2.13% in basis points.
Convert 0.0058 in percentage points.
Question 2
a) A bond that does not pay any coupons will mature in one year. It has
a par value of $100. If it is currently selling at a price of $90.91, what
is the YTM on this bond? Round your answer to the nearest basis point.
b) A bond that pays a yearly coupon of $25 and has face value of
$1,000 will mature in a year. If that bond is currently quoted at 99: 5/32 ,
obtain the YTM of the bond, rounding your answer to the nearest basis
point.
Question 3
A bond pays a coupon rate of 10% per year semi-annually when the
market interest rate is 8% per year. The bond has 3 years until
maturity and par value is $1,000. (Round your answers to the nearest
basis point.)
a) Find the bonds price today.
b) Find the bonds price 6 months later after the next coupon is paid.
c) Find the 6 months rate of return on the bond.

d) If todays price is 990, and we do not know the current market

interest rate, find the YTM of the bond.
Question For Further Practice
You have an investment horizon of 1 year. You can choose between 3
bonds that have similar default risk, similar par value and all mature
in 10 years.
Bond 1 is a zero-coupon bond that pays $1,000 at maturity.
Bond 2 has an 8% coupon rate and pays coupons once a year.
Bond 3 has a 10% coupon rate and pays coupons once a year.
(Round your answers to the nearest basis point.)
a) If all three bonds are priced to yield 8% to maturity, what are their
prices?
b) If YTM at beginning of next year is 8%, what will the prices be at
that time?
c) What will your holding period return be on each bond?
Please use both Excel and manual methods to make sure that you
know how to use the appropriate methods in answering these
questions.