Assignment 1
Coverage chapter 1-4
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- (3 marks) Consider a 30-year, 2% coupon-rate bond, selling at par (face value). Suppose the yield on long bonds is 4% next year. What is the one-year rate of return? Show your steps.
- (4 marks) The Tesla electric car model 3 2024 starting price in Canada is about $50,000. As a promotion the dealer is providing 0% financing (i.e. 0% interest rate) on a loan over 5 years. What is the annual fixed payment on the loan? Explain, working from fundamentals. The dealer will sell the car for less than $50,000, if you give those cash now. You don’t have any cash but can borrow from the bank at an effective interest rate of 4.5%. Find the (threshold) car price, below which you are better off borrowing from the bank and paying the dealer cash? (For this calculate to the nearest 1/10 of a dollar.)
- (10 marks) This question is about coupon bonds (with principal repayment) as in the text, assume that the coupon is paid annually. The Bank of Canada lists the following data for Canada bonds as of January 22, 2018.
| Canada | Coupon Rate% | Yield | Change % |
| 2 Year | 1.25 | 1.81 | -0.01 |
| 10 Year | 1.00 | 2.24 | -0.06 |
- Use the coupon rate and yield to maturity to calculate the prices for the two bonds. Note the face value is not given. Most bond quotes are for $100,000. To make things simple assume the face value is 100. (Then the price could be interpreted as the percentage of the face value.)
- What was price of the 10-year bond on the previous day? What is the one day holding period return (assuming no dividend is paid or imputed from Jan 21 to Jan 22)? Note: the column Change is the change in yield from the previous day.
- Now consider a 5-year bond with yield 2.03 and price 95.4 (as a percentage of par; i.e. face value). What is the coupon (as a percentage of par)?
- Calculate the current yield for the two bonds in the table.
- (3 marks) George looks at the following table that includes all details of three different bonds. There is one thing that immediately captures his attention: one bond has a market value that is not correctly estimated. Help George to find the bond that has an incorrect estimated market value and calculate it yourself.
| Bond | Maturity | Annual coupon interest rate | Yield to maturity | Final reimbursement (Face value) | Market value |
| A | 2 years | 4.0% | 6.0% | 100 | 96.33 |
| B | 2 year | 4.5% | 4.5% | 100 | 100 |
| C | 2 years | 3.0% | 4.5% | 100 | 101.7 |
