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Fixed Income Bond Exercises 2013

The document contains instructions and information for 4 exercises related to fixed income securities: 1) Calculate accrued interest, clean price, dirty price, and comment on pull-to-par effect for a 10-year bond. 2) Calculate total nominal earnings for a bond issued at a discount with annual coupon payments over 3 years. 3) Calculate various duration and convexity measures for a 3-year bond and comment on their meanings and relationships. 4) Calculate bond price volatility for a 4-year bond and compare to precise yield shift calculations. It also provides 3 optional exercises involving credit risk calculations, joint default probabilities, and pricing a callable bond using an interest rate tree model.

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189 views2 pages

Fixed Income Bond Exercises 2013

The document contains instructions and information for 4 exercises related to fixed income securities: 1) Calculate accrued interest, clean price, dirty price, and comment on pull-to-par effect for a 10-year bond. 2) Calculate total nominal earnings for a bond issued at a discount with annual coupon payments over 3 years. 3) Calculate various duration and convexity measures for a 3-year bond and comment on their meanings and relationships. 4) Calculate bond price volatility for a 4-year bond and compare to precise yield shift calculations. It also provides 3 optional exercises involving credit risk calculations, joint default probabilities, and pricing a callable bond using an interest rate tree model.

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© Attribution Non-Commercial (BY-NC)
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MANDATORYEXERCISES:(havetobehandedin);max.10points Exercise1: A 10Y fixed income bond was issued on 1st of January, 2003 at par value.

. The bond pays cupons quarterly starting on the last day of March, 2003 and is repaid at face value of 100. The bond distributes5%p.a.toitsinvestors.Mind,thattheownershipofthebondisdeemedtobetransferred on 20th of February, 2011. The Yield (YTM) to value the bond amounts to 4% p.a. on the day of valuation.Usethe30/360convention. Calculate: Exercise2: ABC Corp. issues a fixed income bond at a discount of USD 2 to final redemption price of USD 100. Finalredemptionis3yearsafterissue.Cuponpaymentsaremadeyearlyatarateof7%. Calculatetotalnominalearningsattributabletoapotentialinvestor. Exercise3: A bond with nominal value of EUR 1.000 and annual cupons (7% p.a.) is maturing 3 years after issue. TheYieldToMaturityiscalculatedas8%p.a.onthepricingdate. Calculate: MacaulayDuration DollarDuration MacaulayDuration DollarConvexity,ConvexityandConvexitiyAdjustment Demonstrate,howConvexityAdjustmentcorrectsDurationforapproximationerrors PlottheP/Ycurvegraphicallyandcommentontheconvexitystyle Compare your results with precise calculation of price changes (up/downward shift of Yield by100BP) EffectiveDurationandConvexity:Commentonthepotentialdifferenceofthesesfiguresvice versa the common MD and C do they offer important insights in this pricing example? Contrarytoherewherearetheyimportanttocalculateandhowdotheycompare? Accruedinterestatdayoftransferofownership CleanPriceatdayoftransferofownership DirtyPricedayoftransferofownership CommentonthePulltoParEffect

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Exercise4: Aplainvanillabondpaysanannualcuponof5%p.a.for4years.Theflatyieldcurveshiftsupwardat the amount of 1 basis point. Calculate the BPV (DV01) separate for each cash flow and comment on the different resultsinrelationtoeach another.Compareyourresultswithprecise calculationofthe NPVafteryieldshift. EXERCISESATYOURCHOICE(2outof3havetobehandedin);max.10Points Exercise5: Xstatra Finance issued a 5 Year USD Bond in October 2012 maturing in October 2017 (bond rating BBB+) at Benchmark +170 or MS + 159. (Source: Credit Suisse Debt Capital Markets, October 2012). AssumetheriskfreeUSTreasuryRateis5%p.a.andtheRecoveryRateforBondsinthatRatingclass is 45%. Calculate the implied cumulative PD and compare the result figures with empirical values fromthedefaulttables.Commentonyourfindings,whatisthedifferencetobeinterpreted? CommentevenontheshapeoftheBBBgraphdefaultfigurescomparedtoAAAratedbonds. Exercise6: Calculate the joint probabilities of default of two financial instruments (margin default probabilities of each at 0,015 over 1 Year time horizon) in the case of 0; 0,1;0,03; 0,5 and 1 correlation. Plot the resultsgraphicallyandcommentonthem. Exercise7: Price a fictitious Callable Bond of AAG issued at the 1.1.X1 using the below attached interest rate tree model. The bond is callable at any node (that means at the discrete points in time, always at 31.12.)ata priceof99,50. This calloptionis thereforereasonablyusedeitheratendofYear1,2or Year3. What about the value of the bond if the option price is set to 100,5 at each node. Comment ontherationalebehind. Calculatetheimplicitoptionvalue. Withoutcalculating,whatistheeffectofestimatedinterestrateVolatility?

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