FACULTY OF COMMERCE

DEPARTMENT OF ACCOUNTING AND FINANCE

Financial Mathematics II Individual Assignment
Question 1
XYZ ltd issued a bond with the following features:
Face value = $1000
Coupon rate = 20%
Maturity date = Dec 31 2018
Coupon dates = June30 and Dec 31
You purchased the bond cum interest on March 31, 2015 when yield to maturity was
22% and you decide to sell it on November 10 2017 when yield to maturity is at 15%
Calculate:
a) Dirty price and clean price of the bond at purchase
b) Dirty price and clean price of bond at sale
c) Realized yield for the bond investment.

(28 Marks)

Question 2
a) Modified duration measures the change in Bonds Price per 100 basis point change in
B0
interest rates ( y ( which is the first derivative of the bond price with respect to
1+ y t

Ct
yield to maturity). Given the following formula for a bond price: B0 =
, use

t =1

calculus methods to derive the formula for the Modified duration of a Bond.
(10 Marks)
b) Preference Shares are known as hybrid securities because they have the Characteristics
of both Equity and Debt. Comment on this statement.
(12 Marks