| Sample Examination Paper
Final Examination
Solutions
Portfolio Management
Derivative Valuation and Analysis
Fixed Income Valuation and Analysis
Exam Guide
Question 1: Bond Valuation and Analysis
(a) Price of bond A = 8/1.0765 + 108/(1+1.0785)2 =100.28
Price of bond B = 9/1.0765 + 9/(1.0785)2+ 109/(1+1.0805)3 = 102.51
(b) Duration of bond B:
Cash flow PV (using YTM of 8.027%) t ′ PV
9 8.33 8.33
9 7.71 15.42
109 86.46 259.38
Total 102.5 283.13
Duration = 283.13/102.5 = 2.76 years
Change in price due to change in yield:
dP = – D ′ P ′ dR/(1+R) = – 2.76 ′ 102.51 ′ 0.002/1.08027 = –0.52
The change in price is +/– 0.52 per 100 nominal.
(c) In 1 year’s time:
* 108
PA = = 100.51
1 075
.
PA* - PA = 100.51 – 100.28 = 0.23
*
CA +(PA - PA ) 8023 + .
′100 =′100 = 8 207 %
.
PA .
200 28
(Note: they receive coupon + price change over 1 year for holding period return)
In 1 year’s time:
PB* =
9 + 109
2 = 102.43
1 075 (1 0765 . )
C + P - 9 +( . -102 51
* P 10243 . )
BBB
′100 = ′100 = 8 71
.%
PB .
102 51
(d) If your view is different to that of the market — as outlined in assumption (i) (e.g.
you believe that a rising yield curve will remain the same) then you will not achieve
the expected holding period returns calculated as in (c). If, on the other hand, you
believe the assumption in (ii), then you expect the holding period returns estimated
in (c) to be achieved. |
