Additional exercises 3

Bonds, Term Structure of Interest rates

1) A bank offers a T-Bill at price P = 995 with face value 1000 and 6 month maturity

a) Compute the simple ( gross) yield rate of the bond

b) Compute the compound (gross) yield rate of the bond

c) Compute the simple net yield rate considering a tax rate of 12.5% to be paid at issuance

2) Consider a Treasury Bill with 1 year maturity, simple (gross) yield rate of 1,5 % and face value
1000
a) Compute its price
b) Assuming no changes in the yield rate, find the bond’s price in 3 month time
c) Assuming no changes in the yield rate, find the simple yield rate considering buying the bond
today and selling it 3 months later

3) Consider a bond with annual coupons, maturity 2.5 years, reimbursement at par. Its face value
is 1000, the coupon rate is j=1.2%, the effective yield rate is 1.3%.

a) Compute the invoice (dirty) price of the bond

b) Compute the current (clean) price of the bond

c) Compute the annual coupon yield rate (immediate rate)

4) Consider an investment in a bond with face value N=1000, reimbursement premium R=10,
maturity T= 8 months, annual coupon rate j=6%, semi-annual coupons.
a) Find its invoice price knowing that the effective yield rate is x= 7.5%

b) Find the current price

c) Find the invoice price P* a month later assuming that the effective yield rate doesn’t change.

5) Given the following ZCB prices (N=100)

Maturity (months) Price

3 98
6 96
9 94
12 92
 a) Find the term structure of (spot) interest rates
b) Find the interest rate for investments from 6 to 12
c) Consider two operations. The first one consists of investing 100 Euro today in a 1 year ZCB.
The second one consists of investing 100 Euro in a 6 month ZCB first and then reinvesting
the amount in another 6 month ZCB. Check that the two operations have the same final
value
d) Assuming that a 1.5 year bond with face value 1000 and reimbursement 1010 will pay
annual coupons of 100 each:
a. Find its coupon d rate
b. Assuming no arbitrage and a market price of 1075, find the 1.5 year spot rate

6) Consider a bond paying the amount of 120 in 1 year and the amount of 1120 in 2 years. The
current spot rates are: h 0(0,1)=1,2%; h0(0,2)=1,3%

a) Compute the bond market price

b) Compute the spot prices and the forward price v 0(1,2)

c) Compute the bond price in a 1 year time if the 1 year spot rate h 1(1,2) is 1% higher than the
current 1 year spot rate

7) Given the following spot prices v0(0,1)=0.98, v0 (0,2)=0.92, v0(0,3)=0.85

a) Complete the prices’ term structure

b) Compute the price today of the following cash flow stream

Maturity(years) Cash flow

1 30
2 40
3 20

c) Is the effective rate higher or lower that 4.5% ? Justify your answer
Answers

 r=1.005%, r=1.0076%, r’=0.8788%

 P=985,2217, P(3m)= 988,8752, r(0,3m)=1.4833%
 Each coupon is 12, the invoice price P= 1003.536, the accrued interest is 6 hence the clean price is
997,53, the annual coupon yield rate is 1.203%
 Each coupon is 30, the invoice price is P=1020.688, the accrued interest is 20 hence the current
price is 1000.688, the price 1 month later P(1m)= 1026.858
 a)h0(0,3/12)=8.4166%, h0(0,6/12)=8.5069%, h0(0,9/12)=8.5999%, h0(0,1)=8.6957% b)
h0(6/12,1)=8.8847%. The coupon rate is 10% and the 1.5 yr spot rate is 8.7327%
 P= 1210.015, the spot prices: v0(0,1)= 0.988142, v0(0,2)= 0.974498, the forward price
v0(1,2)=0.986192, the price i year later P(1)=1095.89
 V0(1,2)=0.9388, v0(2,3)=0.9239, v0(1,3)=0.8673. The price today is 83.20. The IRR will be lower
than 4.5 % since DCF(4.5%)<0 and the DCF(x) of an investment is decreasing with the rate.