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rsm430 Group Assignment - Due Feb 7th 2024

This document outlines a group assignment for an RSM 430HS class. It includes 9 questions related to fixed income valuation, relative value trades, accrued interest calculations, yield curve interpolation, and a repo trade example. Students are asked to show all their work in an Excel workbook and submit it by February 7th for a total of 60 points.

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Grace Idrees
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82 views3 pages

rsm430 Group Assignment - Due Feb 7th 2024

This document outlines a group assignment for an RSM 430HS class. It includes 9 questions related to fixed income valuation, relative value trades, accrued interest calculations, yield curve interpolation, and a repo trade example. Students are asked to show all their work in an Excel workbook and submit it by February 7th for a total of 60 points.

Uploaded by

Grace Idrees
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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RSM 430HS - Group Assignment

Due: Wednesday, Feb. 7th by 11:59 pm. Total points available: 60 points
Project Groups are posted on Quercus. Show all your work in a excel workbook.

Questions 1 - 4 from Case 1 Fixed Income Valuation (18 marks)


Please answer Case 1, Fixed Income Valuation, questions 1,2,3a (not 3b), 4

Question 5 from Case 2 Deutsche Bank (10 marks)


Please use Case 2, Deutsche Bank: Finding Relative Value Trades.
a) (5 points) Using the posted excel workbook OR the information posted under
Exhibits 1 and 4 below, calculate the corresponding annual bond equivalent
(BEY) zero rate for each bond (Exhibit 1 from 02/14/2004 to 8/15/2008).
b) (5 pts) Compare the calculated the annual zero rates to Deutsche Bank's model
prediction (excel tab Exhibit 4/table below) and clearly identify any differences in
yield to maturity (i.e. where an arbitrage opportunity exists).

Hint: Bootstrap based on market prices instead of creating par curve first

Exhibit 1: Spot rates to calculate (first five years)


Coupon Rate (%) Maturity Date Current Price Spot Rate
3 2/15/2004 101.0544
2.125 8/15/2004 100.9254
1.5 2/15/2005 99.8942
6.5 8/15/2005 109.0934
5.625 2/15/2006 108.438
2.375 8/15/2006 99.7848
6.25 2/15/2007 111.7184
3.25 8/15/2007 101.0841
3 2/15/2008 99.1692
3.25 8/15/2008 99.271
Exhibit 4: Output from Deutsche Bank's Zero-Coupon Yield Model to compare:
Maturity (years) Model Prediction (BEY)
1y 1.2443%
2y 1.8727%
3y 2.4110%
4y 2.9665%
5y 3.4454%

Question 6 (10 marks) Accrued Interest


An investor purchases the following bonds for a portfolio and the settlement dates are
given for each transaction. For each bond position calculate i) the accrued interest to the
settlement date and ii) the total purchase price (clean price plus accrued interest) paid
by the investor. Please provide your answer to 3 decimal places.

1
RSM 430HS - Group Assignment
Due: Wednesday, Feb. 7th by 11:59 pm. Total points available: 60 points
Project Groups are posted on Quercus. Show all your work in a excel workbook.

a) (3.5 pts) $1000 par value of Walmart 4.10% USD bond due April 15, 2033. The
investor bought the bonds in the market at a clean price of 94.298 per bond. The
bond has a 30/360 day count convention and settles on November 27, 2023.
b) (3 pts) $1000 par value of Rogers Communications Inc. 3.65% CAD bond due March
31, 2027. The investor bought the bonds in the market at a clean price of 94.9255
per bond. The bond has an actual/365 day count convention and settles on
November 27, 2023.
c) (3.5 pts) $1000 par value of a US treasury bond: T 4 ¾% bond due November 15th,
2053. The investor bought the bonds in the market at a clean price of 103-14 per
bond. The bond has actual/actual day count convention and settles on November
24, 2023.

Question 7 (7 marks) Linear Interpolation


Please use the Government of Canada bond data provided below. The yield to maturity
levels on the government of Canada bonds are as of November 23, 2023. Assume this
is the date the coupon will be set (pricing date).

Bond Price YTM

a) (3 marks) What challenge does the inverted yield curve present for bankers and
investors when trying to calculate an interpolated yield to maturity for a given
calendar date. How, in your opinion, can you address it? (maximum 3-4 sentences).
b) (4 marks) An A-rated company is issuing a bond that matures November 23rd, 2028,
hence a new 5-year bond. The new issue credit spread is +50 bps. Using this
information, please calculate the expected coupon (to 3 decimal places) on this bond
as of the pricing date. State which bond(s) you are using for your calculations and
whether you are using bid side or ask side yields and why. (maximum 2-3
sentences).

Note that 'Bloomberg' identifies the on-the-run bonds in yellow but you may use any
bond that you assume is liquid.

2
RSM 430HS - Group Assignment
Due: Wednesday, Feb. 7th by 11:59 pm. Total points available: 60 points
Project Groups are posted on Quercus. Show all your work in a excel workbook.

Question 8 (10 marks)

The above table shows the auction results for the 2-year Government of Canada
benchmark bond. Assume the bond pays coupons semi-annually and has an
actual/365days day count convention. The Issue date is the same as the Settlement
date for pricing purposes.
a) (4 pts) Using the information above, what was the average clean price for the 2-
year bond? How much accrued interest was there on the bond on December 13th,
2023?
b) (3 points) After the auction, there was 16.5 billion of the 2-year bond outstanding.
Assume the total bids received from the primary dealers was 12.496 billion. What
was the size of this 2-year benchmark bond auction? Briefly explain.
c) (3 pts) Briefly explain the auction tail. Should the Bank of Canada want a ‘wide’ tail or
a ‘tight’ tail? Briefly explain.

Question 9 (5 marks)
On October 22nd, 2018, Dealer A purchased $1 million face amount of a 7.25%, May
15, 2028, Government of Canada bond. Assume that October 22nd is the settlement
date for the bond purchase and the day count convention is actual/365 days.
Dealer A wants to finance the trade through a repurchase agreement and will carry the
position for a term of 3 days. The repo rate is 4%. When the bond is returned to Dealer
A, he sells it in the bond market. Given the market prices provided in the table below,
what is the profit or loss associated with the repo trade? Note: the profit will be the
difference between what Dealer A borrowed vs. price sold in the market 3 days later.
Assume a haircut of 0.5% on the repo. Show all your work.

Clean Prices of the 7.25% bond due May 15, 2028


October 22nd 94.16
October 23rd 94.97
October 24th 95.03
October 25th 96.78

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