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DRM-CLASSWORK - 14th June

1. A 5-year bond with a 10% yield pays 9% annual coupons. The bond's price is calculated to be [ANSWER], its duration is [ANSWER], and a 0.4% decrease in yield would cause the price to change by [ANSWER]%. 2. A company expects Rs. 10 crore in 3 months and wants to hedge against falling interest rates. Entering a 3/6 FRA at 7% would effectively return [ANSWER]% if MIBOR rises to 9% and [ANSWER]% if it falls to 6%. 3. An FRA was bought for Rs. 1 million at a rate of 7.5-7.64

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Saransh Mishra
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127 views4 pages

DRM-CLASSWORK - 14th June

1. A 5-year bond with a 10% yield pays 9% annual coupons. The bond's price is calculated to be [ANSWER], its duration is [ANSWER], and a 0.4% decrease in yield would cause the price to change by [ANSWER]%. 2. A company expects Rs. 10 crore in 3 months and wants to hedge against falling interest rates. Entering a 3/6 FRA at 7% would effectively return [ANSWER]% if MIBOR rises to 9% and [ANSWER]% if it falls to 6%. 3. An FRA was bought for Rs. 1 million at a rate of 7.5-7.64

Uploaded by

Saransh Mishra
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FOR CLASSWORK-14th June

1. A Five year Rs 100 bond with yield of 10%( continuously compounded) pays
9% coupon at the end of each year.
a) What is the bond’s price?
b) What is the bond’s duration?
c) Use the duration to calculate the effect on the bond’s price of a 0.4%
decrease in its yield

Recalculate the bond’s price on the basis of 9.6% per annum yield and verify
your answer with answer to (c) above

2. Prosperous Investment Ltd is expecting a receipt of 10 crore for 3months’


investment after three months. The yield contemplated is 7%, but likely to fall. A
bank has offered 3/6 FRA at 7% based on the 3-m MIBOR as a bench mark. How
can this company hedge against the falling interest rates? Find out the effective
return if (a) MIBOR rises 9% (b) MIBOR falls to 6%. Consider equal change in
MIBOR and interest yield, and 90days in 3 months and 360 days in a year.
Assume interest as quarterly compounding

3 A market maker quotes 3 × 5 FRAs at 7.5 (bid) and 7.64 (ask). You buy an FRA
with a principal amount of Rs 1 million loan On the settlement date, the following
spot rates are observed:

Maturity Rate

2 months 8.45%

3 months 8.38%

4 months 8.32%

5 months 8.26%

Assume that the banks use the convention of 360 days in a year to compute the
settlement amount and the number of days per month is 30 days.
When will the payments be made? Will you receive a payment on the settlement day
or will you have to make a payment? What will be the settlement amount?

4. A 10-year 8% coupon bond currently sells for $90. A 10-year 4% coupon bond
currently
sells for $80. What is the 10-year zero rate?

5 The face value of a 20 year bond with a coupon payment of 12% p.a. is Rs
1000. The prices of this bond at YTM of 11%, 12% and 13% are Rs 1079.63, Rs
1000 and Rs 929.75 respectively.
a) Calculate the Convexity of this bond.

6.Mr.Lucky, the finance manager of Gemini enterprises requires INR 5,000,000


for expansion over a period of two years. He approaches the bank for a loan to
finance this expansion project on January 1, 2019. The bank offers him two
choices:

i. A loan with a fixed rate of 9% for the next two years, with interest payable
every six months.

ii. . A floating rate loan with the base rate of six-month MIBOR, with a reset
period every six months. The rate on the loan will be six-month MIBOR +
180 basis points, and interest will be payable at the end of every six
months. MIBOR on January 1, 2019, at the time of taking the loan is 6%.

Lucky is not sure which of these loans he should opt for. He has contacted some
analysts to get some idea about where MIBOR rates could be in the next two years,
and the analysts estimates are: six-month MIBOR on July 1, 2019 is 6.8%; on
January 1, 2020, is 7.3%; and on July 1, 2020, is 7.1%.
a) Calculate the effective interest rates on January 1, 2019; July 1, 2019; January 1,
2020; and July 1, 2020, under the floating rate loan.
b) Calculate the interest amount on June 30, 2019; December 31, 2019; June 30,
2020; and December 31, 2020, under both fixed rate loan and floating rate loan.

c) On the basis of the interests calculated, determine which alternative

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