Assignment Questions
Excel data entry and modeling is not introduced at this late stage of the course, so some of these questions involve only simple calculations and interpretation of Excel calculations already done for you. MBAD 6234 Financial Markets will use Excel extensively, so plan for some time to practice Excel if you need to. ‘Custom Excel Tutorial.xls’ is posted on the Bb Syllabus page for that purpose.

#1– Explain the calculations in each of the three panels below, one at a time. Explain the purpose of the calculation and the procedure of the calculation, i.e., how the data inputs determine the output – the result. Bond Questions Support Sheets.xlsx (posted on Bb assignment page) has ‘live’ sheets so you can see how the calculations work.
buy at par BOND CASH FLOWS
1994 1995 1996 1997 1998
Purchase Price -1000
Interest 102.5 102.5 102.5 102.5
Sale Price 1000
Sum -1000 102.5 102.5 102.5 1102.5
YTM 10.25%

buy at discount BOND CASH FLOWS
1994 1995 1996 1997 1998
Purchase Price -900
Interest 102.5 102.5 102.5 102.5
Sale Price 1000
Sum -900 102.5 102.5 102.5 1102.5
YTM 13.66%

buy at premium BOND CASH FLOWS
1994 1995 1996 1997 1998
Purchase Price -1100
Interest 102.5 102.5 102.5 102.5
Sale Price 1000
Sum -1100 102.5 102.5 102.5 1102.5
YTM 7.28%


#2– Explain the calculations in each of the two panels below, one at a time. As in #1, consider the inputs and output – the results. Then, explain the difference between the two panels. Use Bond Questions Support Sheets.xlsx, as for #1 above.

#3- Determine the yield to maturity on a 10-year 6% bond selling at par if the going rate (current interest rate for newly issued bonds of the same quality rating) is 6%? This is a think question; not a calculation question. Briefly explain how you reached your answer.
#4- If Treasury bonds are risk free, why is there a standard deviation around their mean rate of return? Refer to the table on page 17 of this PDF. HINT: Examine the blue treasury interest rate trend in the chart on page 4.

#5– Your pension fund has a sub-portfolio of bonds. The duration of this bond portfolio is 8 years. The current market value of the bond portfolio is $1,000,000. Calculate the price change expected on the bond portfolio if interest rates rise from their current level of 5% to 7%, and discuss whether or not this is an example of interest rate risk.
#6- Explain in one sentence why the duration on a zero coupon bond is equal to its maturity.