TMA Template
FIN357e
Fixed Income Securities
Tutor-Marked Assignment
July 2019 Presentation
FIN357e Tutor-Marked Assignment
SINGAPORE UNIVERSITY OF SOCIAL SCIENCES (SUSS) Page 2 of 5
TUTOR-MARKED ASSIGNMENT (TMA)
This assignment is worth 38% of the final mark for FIN357e Fixed Income Securities.
The cut-off date for this assignment is 15 October 2019, 2355 hrs.
Note to Students:
You are to include the following particulars in your submission: Course Code, Title of the
TMA, SUSS PI No., Your Name, and Submission Date.
You must answer ALL the questions. (Total 100 marks)
Question 1
(a) Suppose that you are given the following information about two callable bonds of the
same issue that can be called immediately:
You are told that both bonds have about the same maturity and the coupon rate of one
ond is 7% and the other is 13%. Suppose that the yield curve for this issuer is flat at
8%.
Based on this information, evaluate which bond is the lower coupon bond and which is
the higher coupon bond? Explain why.
(7 marks)
(b) Suppose that a 6% coupon corporate bond is immediately callable. Also suppose that if
this issuer issues new bonds the coupon rate would be 12%.
Why would the modified duration be a good approximation of the effective duration
for the old bond?
(6 marks)
(c) A three-year old 10-year 9% semi-annual coupon bond is selling at $1, XXXXXXXXXXtoday.
If the yield increases by 75 basis points, how much of the price change is due to
convexity of the bond? (Face Value = $1,000)
(7 marks)
-50 basis points +50 basis points
Bond ABC +2% -5%
Bond XYZ +11% -8%
Estimated % price change if interest rates change by:
FIN357e Tutor-Marked Assignment
SINGAPORE UNIVERSITY OF SOCIAL SCIENCES (SUSS) Page 3 of 5
Question 2
“Hyflux default signals more trouble ahead for Singapore bond market: S&P”.
(Headline in Business Times article dated 9 April 2019)
(a) Based on your understanding of credit analysis, analyse the claim in the headline of the
article.
(10 marks)
(b) Discuss why lenders to Hyflux would place much less emphasis on its electricity
generation assets as collateral and instead focus on Hyflux’s revenue?
XXXXXXXXXXmarks)
Question 3
(a) What is the reinvestment risk and interest rate risk associated with the Yield-to-
Maturity measure? Describe and appraise these notions
(4 marks)
(b) The following yield and prices are reported in the financial press. Are any of them
inco
ect assuming that the reported price and coupon rate are co
ect? If so, explain
why. (No calculations are needed to answer this question)
(8 marks)
(c) Assuming the Expectation Theory holds, and the 1-year forward rate beginning in 6
months is 9.25%, a
itrage the market with the given spot rates below. Determine the
a
itrage profit based on $1 million bo
owed. (Assume monthly compounding)
(8 marks)
Bond Price Coupon (%) Cu
ent Yield (%) Yield to Maturity (%)
A XXXXXXXXXX
B XXXXXXXXXX
C XXXXXXXXXX
D XXXXXXXXXX
E XXXXXXXXXX
FIN357e Tutor-Marked Assignment
SINGAPORE UNIVERSITY OF SOCIAL SCIENCES (SUSS) Page 4 of 5
Question 4
The following question concerns the binomial tree model which is a well-known model
developed for risk hedging and immunisation involving options.
Given in Exhibit A below are the on-the-run Treasury rates.
Exhibit A
The 4-period binomial tree under volatility assumptions 15% and 25% of these Treasury rates
are shown respectively in Exhibit B and Exhibit C (at the end of this paper).
Given an option-free annual bond with face value $100, coupon 8% and 4 years to maturity,
(a) Price this bond with the spot rate curve given in Exhibit A.
(4 marks)
(b) Price this bond again with the binomial trees in Exhibit B and C.
(6 marks)
(c) Comment on your findings in parts (a) and (b) above.
(4 marks)
(d) Price this bond again assuming it is a callable bond with call price $102, $101 and $100
in years 1 to 3 respectively with the binomial trees in Exhibit B and C.
(6 marks)
(e) Comment on your findings in part (d) above, specifically compare them with your
answers in parts (a) to (c).
(4 marks)
(f) If the observed market price of this callable bond is $ XXXXXXXXXX, determine the nominal
spread and Z-spread of this bond.
(6 marks)
(g) At this market price $ XXXXXXXXXX, what is the Option Adjusted Spread under Exhibit B
and C.
(6 marks)
(h) Comment on your answers in part (g) above.
(4 marks)
FIN357e Tutor-Marked Assignment
SINGAPORE UNIVERSITY OF SOCIAL SCIENCES (SUSS) Page 5 of 5
Exhibit B Exhibit C
---- END OF ASSIGNMENT ----
Exhibit B: Binomial Tree under 15% Volatility Assumption
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PV/FaceValue 100
coupon 8
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8 8
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8 8
12d r34udd
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8
Exhibit C: Binomial Tree under 25% Volatility Assumption
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ate
PV/FaceValue 100
coupon 8
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8
23uu uuud
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8 8
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8 8
01 r23ud uudd
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8 8
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8 8
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8
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100
8
Tutor-Marked Assignment
July 2019 Presentation
TUTOR-MARKED ASSIGNMENT (TMA)
Course Code
FIN357
Fixed Income Securities
Study Guide (5CU)
Course Development Team
Head of Programme : Dr Tan Chong Hui
Course Developer : Dr Ding Ding
Production : Educational Technology & Production Team
© 2019 Singapore University of Social Sciences. All rights reserved.
No part of this material may be reproduced in any form or by any means without
permission in writing from the Educational Technology & Production, Singapore
University of Social Sciences.
Educational Technology & Production
Singapore University of Social Sciences
463Clementi Road
Singapore 599494
Release V1.5
CONTENTS
SECTION 1: COURSE GUIDE
1.1 Introduction .................................................................................. XXXXXXXXXX1
1.2 Course Description and Aims .................................................... XXXXXXXXXX2
1.3 Learning Outcome ....................................................................... XXXXXXXXXX2
1.4 Overall Assessment ..................................................................... XXXXXXXXXX3
1.5 Learning Materials ....................................................................... XXXXXXXXXX5
SECTION 2: STUDY UNITS
STUDY UNIT 1
Learning Outcomes ···················································································· SU1-1
Overview ······································································································ SU1-1
Chapter 1: Introduction to Fixed Income Securities ····························· SU1-2
Chapter 2: Risks associated with Investing in Bonds ···························· SU1-7
Chapter 3: Major Bond Types and their Characteristics ····················· SU1-10
STUDY UNIT 2
Learning Outcomes ···················································································· SU2-1
Overview ······································································································ SU2-1
Chapter 4: Yield Spreads and Interest Rate Determination ·················· SU2-2
Chapter 5: Valuation of Bonds