Category Bond Pricing the RCY and bond management

Bond Pricing the RCY and bond management – Forward Rates and the Term Structure

Bond Pricing the RCY and bond management


(a) What are ‘bond characteristics’? Explain how these influence the way that a bond price changes in response to changes in market interest rates?

(b) Using the following UK government gilts currently in issue:
Treasury 8% 31st December 2015
Treasury 8% 31st December 2021
Treasury 6% 31st December 2028
Estimate the fair price of these £100 semi-annual bonds for a yield of 3% p.a. as at 31st December 2011 (it can be assumed that the yield curve is flat).
(c) If yields increase to 3.5% p.a. estimate the new fair price of the bonds in (b) above.

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(d) A 4 year bond of £100 face value has a coupon of £9 that is paid once per year. If the expected interest rates are 8% 7% 6% and 5% respectively for the next 4 years...

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