I was wondering about my question in the posting prior to the above post. I still did not understand why we multiplied 0.078 by 360/360, rather than multiplying it by 330/360.
This is regarding Question 30 answer.
I was wondering about my question in the posting prior to the above post. I still did not understand why we multiplied 0.078 by 360/360, rather than multiplying it by 330/360.
This is regarding Question 30 answer.
Q32 Ans C:
This is similar to the previous question, here we need to find out the present value factor for the rates which are after 90 days, 270 days and 450 days.
PV of rate after 90 days = Z1 = $1 / (1.015) = 0.9852
Similarly, Z2 = 1/(1 + 270/360 * 7%) = 0.9501
Z3 = 1/(1 + 450/360 * 7.5%) = 0.9143
Fixed rate = (1 – Z3) / (Z1 + Z2 + Z3) = 3.0079%
Or annual rate = 6.0158%
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Today's Question (Questions and answers provided by Knowledge Varsity)
Q33. Omar is assigned the task to find out the value of the Swap to Manza after 270 days of the initiation. The LIBOR rate that was fixed in the last payment date was 5.379% (for the 2nd payment). Which of the following is most likely the value of the swap to Manza?
A. -$ 1.5920 million
B. -$ 1.4053 Million
C. $1.0577 Million
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Q33 Ans A:
Since the floating rate has increased, Manza would have to pay for the swap while entering into the offsetting contract. Manza’s position in the swap can be viewed as:
- Manza is long in fixed income bond
- Manza is short in floating rate bond
To find out the value of the swap, we will find out the difference between the value of fixed rate bond and the floating rate bond.
First we need to find out the value of the fixed bond , consider face value to be $100, then the coupon is $2.86, we are to receive 3 coupons and the face value of $100.
Value = 2.86/1.015 + 2.86 / (1 + 7%*270/360) + 102.86 / (1 + 7.5% * 450/360)
Value = 99.5799
We next find the value of the floating rate bond. Since the rate decided in the last reset date was 5.379%, the coupon will be $2.6895 (assuming the floating bond has face value of $100)
The floating rate bond will reset to face value on the reset date, hence the value of the floating rate bond will be = 102.6895/1.015 = $101.1719
Difference between the value of the bond = 95.5799 – 101.1719 = - 1.5920
This is the value for $100 notional value, for $100 million notional value, this will become equal to -$1.5920 million
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Today's Question (Questions and answers provided by Knowledge Varsity)
Case on Fixed income
Manpreet Bhatia, CFA is a fixed income analyst with Khalsa financial services ltd. Manpreet is analysing a treasury bond and is trying to value it using the binomial model.
Manpreet has estimated the following interest rate scenario for the binomial model. The current year is denoted as t=0 and the next year is denoted as t=1.
T = 0 ................. T=1
..................... 6.8548%
4.1%
......................5.9%
Q34. Find out the value of a treasury bond that will mature in 2 years, pays $8 as the annual coupon and has face value of $100. The bond doesn’t have any embedded option.
A. $100.4864
B. $105.21
C. $101.5274
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Based on my calculation as follows, the answer is B:
V0= 1/2[((101.07+8)+(101.98+8))/1.041] = $ 105.21.
Q34 Ans B:
We can find out the value of the bond by discounting the
future payoff. In case of interest rate model, both the nodes have 0.5
probability of occurrence (unlike the stock binomial model)
Value of the bond at the upper node after 1 year
= (108 * 0.5 + 108 * 0.5)/1.068548 = 101.0717
Value of the bond at the lower node after 1 year
= (108 * 0.5 + 108 * 0.5)/1.059 = 101.983
Value of the bond at the starting node
= {(101.0717+8) * 0.5 + (101.983 + 8) * 0.5}/1.041 = 105.21
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Today's Question (Questions and answers provided by Knowledge Varsity)
Q35. What would be the value of a callable bond that will mature in 2 years, pays $8 as the annual coupon and has face value of $100. The bond can be called at $101.5 after 1 year?
A. $97.2967
B. $104.9816
C. $105.21
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Based on my calculations the answer is B.
Please note that I still have not got an explanation for Q 30 answer.
Ashish,
We have request Knowledge Varsity to clarify Q.30. They are expected to respond soon.
- Team DG
Thank you.
Q35 Ans B:
We can find out the value of the bond by discounting the future payoff. In case of interest rate model, both the nodes have 0.5 probability of occurrence (unlike the stock binomial model)
Value of the bond at the upper node after 1 year
= (108 * 0.5 + 108 * 0.5)/1.068548 = 101.0717
Value of the bond at the lower node after 1 year
= (108 * 0.5 + 108 * 0.5)/1.059 = 101.983
Value of the bond at the starting node
= {(101.0717+8) * 0.5 + (101.983 + 8) * 0.5}/1.041 = 105.21
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Today's Question (Questions and answers provided by Knowledge Varsity)
Q36. What would be the value of a putable bond that will mature in 2 years, pays $8 as the annual coupon and has face value of $100. The bond can be put at $101.5 after 1 year?
A. $105.419
B. $105.21
C. $105.18
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Q.36 - b
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