Expert Answer:METAD 712 2 Financial Markets & Institutions Bond

  

Solved by verified expert:Please look at the 2 files.One is about 2 problems of bond pricing calculations,the other one is about searching current interest rates.I think it could be finished in 3 hours.
metad712_exercise1.docx

metad712_exercise2.docx

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Financial Markets & Institutions
Interest Rate Exercise
Homework Exercise 1
What are the current interest rates for the following?
Instrument
Rate
Source of
Information
Short Term Rates / Money Market
30 Day / 1 month T-Bills
90 Day / 3 month T-Bills
1 Yr. T-Bills
US Commercial Paper (indicate term)
Overnight Repos
Federal Funds (indicate term)
Eurodollar Deposits (indicate term)
Euro CP (indicate term)
US Discount Rate
LIBOR (US$) (indicate term)
EURO LIBOR (Euribor) (indicate
term)
Long Term Rates / Bond Market
5 Yr. Treasury Notes
10 Yr. Treasury Notes
30 Yr. Treasury Bonds
5 Yr. TIPS (Treasury Inflation
Protected Securities)
US Agency Bonds, e.g. Fannie Mae,
Freddie Mac, Ginnie Mae
US Corp Bonds – Investment Grade
US Corp Bonds – High Yield / Junk
Muni Bonds
Note the source(s) for your information. Also, you may want to indicate the term for bond rates if you find
that the rates differ significantly depending on the maturity.
Plot the Yield Curve for US Treasuries. Putting Maturity on the X-axis and Yields on the Y-axis [ Suggest
you use the Charting function in Excel and select the Scatter option ]
From the data above
Maturity
30 Day / 1 month T-Bills
90 Day / 3 month T-Bills
1 Yr. T-Bills
5 Yr. Treasury Notes
10 Yr. Treasury Notes
30 Yr. Treasury Bonds
Maturity
.0833
Yield
Financial Markets & Institutions
Bond Pricing Exercise
Homework Exercise 2
1) Calculate the Value of the Bonds under the following assumptions:
Assume that the principal amount for all bonds is $1000 and that interest is paid
annually.
Period 1
Period 2
Initial Market Interest Rate = 3%
Maturity (in Years)
Coupon
3
15
Rate
3%
4%
5%
Market Interest Rate changes to 4%
Maturity (in Years)
Coupon Rate
3
15
3%
4%
5%
% Change in Value from Period 1 to 2
3 Yr
3% coupon
4% coupon
5% coupon
15 Yr
2) What do you conclude about the relative sensitivity of bond prices to changes in
interest rate?
a) Longer maturities relative to shorter maturities?
b) High coupon bonds relative to lower coupon bonds?
3) An individual investor is considering two possible bonds. A Corporate Bond provides
a current yield of 6%. A Municipal Bond provides a current yield of 3.5%. The investor
pays a marginal federal tax rate of 30%. (Ignore state or city income taxes for this
problem).
a.
What is the effective AFTER TAX yield on the Corporate Bond
b. What is the effective AFTER TAX yield on the Muni Bond?
c. If the investor paid a marginal tax rate of 25%, which investment would
provide a higher after tax yield? If the marginal tax rate were 35%?

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