Assignment Questions

#1– Explain the calculations in each of the three panels below, one at a time. Explain the purpose of the calculation and the procedure of the calculation, i.e., how the data inputs determine the output – the result. Bond Questions Support Sheets.xlsx (posted on Bb assignment page) has ‘live’ sheets so you can see how the calculations work.

#2– Explain the calculations in each of the two panels below, one at a time. As in #1, consider the inputs and output – the results. Then, explain the difference between the two panels. Use Bond Questions Support Sheets.xlsx, as for #1 above.

#3- Determine the yield to maturity on a 10-year 6% bond selling at par if the going rate (current interest rate for newly issued bonds of the same quality rating) is 6%? This is a think question; not a calculation question. Briefly explain how you reached your answer.

#4- If Treasury bonds are risk free, why is there a standard deviation around their mean rate of return? Refer to the table on page 17 of this PDF. HINT: Examine the blue treasury interest rate trend in the chart on page 4.

#5– Your pension fund has a sub-portfolio of bonds. The duration of this bond portfolio is 8 years. The current market value of the bond portfolio is $1,000,000. Calculate the price change expected on the bond portfolio if interest rates rise from their current level of 5% to 7%, and discuss whether or not this is an example of interest rate risk.

#6- Explain in one sentence why the duration on a zero coupon bond is equal to its maturity.