Take Home Quiz 2
1. Today is 1 July 2018. Janet has a portfolio which consists of three differ-
ent types of financial instruments (henceforth refe
ed to as instrument A,
instrument B and instrument C. Janet’s portfolio is composed of 100 units
of instrument A, 150 units of instrument B and 250 units of instrument C).
(35 marks)
• Instrument A is a zero-coupon bond with a face value of 100. This bond
matures at par. The maturity date is 1 January 2025.
• Instrument B is a Treasury bond with a coupon rate of j2 = 3.55% p.a.
and face value of 100. This bond matures at par. The maturity date is
1 July 2020.
• Instrument C is a Treasury bond with a coupon rate of j2 = 3.25% p.a.
and face value of 100. This bond matures at par. The maturity date is
1 January 2020.
a. i. [2 marks ] Calculate the cu
ent price of instrument A per $100 face value.
Round your answer to four decimal places. Assume the yield rate is
j2 = 3.5% p.a.
ii. [2 marks ] Calculate the cu
ent price of instrument B per $100 face value.
Round your answer to four decimal places. Assume the yield rate is
j2 = 3.5% p.a. and Janet has just received the coupon payment.
iii. [2 marks ] Calculate the cu
ent price of instrument C per $100 face value.
Round your answer to four decimal places. Assume the yield rate is
j2 = 3.5% p.a. and Janet has just received the coupon payment.
. i. [1 marks ] What is the duration of instrument A? Express your answer in
terms of years and round your answer to three decimal places. Assume
the yield rate is j2 = 3.5% p.a.
ii. [2 marks ] What is the duration of instrument B? Express your answer in
terms of years and round your answer to three decimal places. Assume
the yield rate is j2 = 3.5% p.a.
iii. [2 marks ] What is the duration of instrument C? Express your answer in
terms of years and round your answer to three decimal places. Assume
the yield rate is j2 = 3.5% p.a.
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ACST201 Financial Modelling Take Home Quiz 2 S2 2018
c. i. [2 marks ] Without actually calculating the new price, use the price in
part a and the duration values in part b to estimate (use the price sen-
sitivity formula) the change in price of instrument B that would result
from an increase in yield rate of 10 basis points. Round your answer to
two decimal places.
ii. [2 marks ] Based on the price in part a and the duration values in part b,
calculate the cu
ent duration of Janet’s portfolio. Express your answe
in terms of years and round your answer to two decimal places.
d. Janet plans to sell the whole portfolio on 1 January 2019 at a sale yield rate of
j2 = 3.65% p.a. Assume that Janet will receive the coupon payments before
the sale.
i. [2 marks ] Calculate the sale price of instrument A per $100 face value.
Round your answer to four decimal places.
ii. [2 marks ] Calculate the sale price of instrument B per $100 face value.
Round your answer to four decimal places.
iii. [2 marks ] Calculate the sale price of instrument C per $100 face value.
Round your answer to four decimal places.
iv. [6 marks ] Janet purchased the instrument C on 1 January 2014 at a price
of $ XXXXXXXXXXper $100 face value. Calculate the holding period yield rate
of one instrument C. Assume the reinvestment rate is j2 = 4.15% p.a.
from the start of 2014 to the end of 2015 and j2 = 3.95% p.a. from the
start of 2016 to the end of 2018. Express your answers as a j2 percentage
ate and round your answers to one decimal place.
e. [8 marks ] Janet will use part of the sale proceeds of these instruments to
purchase a corporate bond with a coupon rate of j2 = 3.6% p.a. and face value
of 100 on 1 January 2019. This corporate bond matures at par. The maturity
date is 1 July 2024. The yield rate is assumed to be j2 = 3.7% p.a. Assume
that this corporate bond has a 4% chance of default in any six-month period
during the term of the bond. Assume also that, if default occurs, Janet will
eceive no further payments at all. Calculate the purchase price for 1 unit of
this corporate bond. Round your answer to three decimal places. Draw the
detailed contingent cash flow diagram associated with this corporate bond,
from the perspective of Janet.
End
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ACST201 Financial Modelling Take Home Quiz 2 S2 2018
The deadline for Take Home Quiz 2 submission is October 16th 2018, 9:00AM.
To complete the submission part of this assessment, you need to submit your solu-
tions (in one PDF file) to the link on iLearn. It can be typed or handwritten and
scanned. You need to show the working steps in your solution. Please refer to the
Assessment submission guide on iLearn for further submission details. Please note
that uploading a file can take up to 15 minutes. You need to submit your file at
least 20 minutes before the deadline to ensure a successful submission.
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ACST201 Financial Modelling Take Home Quiz 2 S2 2018