Need Help for FINS2624 quiz!!!!!! (1 Viewer)

[charleneyin]

1. Of the assumptions below, the most likely to hold in practice is:



a.Constant interest rates

b.Complete markets

c.Zero transaction costs

d.No default risk

e.Arbitrage-free prices

2. Suppose you are faced with the following interest rates:
r₁ = 9%
r₂ = 10%
r₃ = 11%
Now consider a bond with a $100 face value maturing in three years. The bond pays annual coupon payments at a 5% coupon rate. How much would it cost? Answer with one decimal point.


3. Consider a bond with a face value of $100, paying an annual coupon of $20 and maturing in two years. The one-year interest rate is 10% (r₁ = 10%) and the two-year interest rate is 7% (r₂ = 7%). What is the yield-to-maturity of the bond?
Answer

<input type="radio" name="mc-ans-_13446539_1" value="0">		6.83%
<input type="radio" name="mc-ans-_13446539_1" value="1">		7.24%
<input type="radio" name="mc-ans-_13446539_1" value="2">		10.00%
<input type="radio" name="mc-ans-_13446539_1" value="3">		10.91 %

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4. A 10-year zero coupon bond with a face value of $100 is trading in the market. How much money would you have to deposit in a bank to replicate its cash flows?

a.FV
b.FV*(1+r1)
c.FV/(1+r10)*10
d.FV/1+r1
e.FV/1+r10

PLZ HELP ME! THANK YOU!

 

[Trans4M]

1. Of the assumptions below, the most likely to hold in practice is:



a.Constant interest rates

b.Complete markets

c.Zero transaction costs

d.No default risk

e.Arbitrage-free prices

Arbitrage Free Prices - market should react quickly if they see this opportunity so can be almost impossible for arbitrage prices to exist.

2. Suppose you are faced with the following interest rates:
r₁ = 9%
r₂ = 10%
r₃ = 11%
Now consider a bond with a $100 face value maturing in three years. The bond pays annual coupon payments at a 5% coupon rate. How much would it cost? Answer with one decimal point.

Draw out the cash flow. Since it's a 5% coupon bond for 3 years. The cash flows are Y1 = $5, Y2 = $5 and Y3 = $105. You discount cash flow for Y1 by r1, cash flow for Y2 by r2 squared(since two years) and cash flow for Y3 by r3 cubed (since 3 years). Then add them up and get your price.

3. Consider a bond with a face value of $100, paying an annual coupon of $20 and maturing in two years. The one-year interest rate is 10% (r₁ = 10%) and the two-year interest rate is 7% (r₂ = 7%). What is the yield-to-maturity of the bond?
Answer

<input type="radio" name="mc-ans-_13446539_1" value="0">		6.83%
<input type="radio" name="mc-ans-_13446539_1" value="1">		7.24%
<input type="radio" name="mc-ans-_13446539_1" value="2">		10.00%
<input type="radio" name="mc-ans-_13446539_1" value="3">		10.91 %

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Find the price of the bond like how you would in the question above. Then use the bond pricing formula to find YTM by subbing in those interest rates. You should get 7.24%.

4. A 10-year zero coupon bond with a face value of $100 is trading in the market. How much money would you have to deposit in a bank to replicate its cash flows?

a.FV
b.FV*(1+r1)
c.FV/(1+r10)*10
d.FV/1+r1
e.FV/1+r10

PLZ HELP ME! THANK YOU!

Answer = C.

You take the interest rate for a 10 year investment and discount it to the power of 10 since it's ten years.

Hope that helps.

 

[charleneyin]

thank you very much for the help!