Question

4. Determine what fraction of the total variation in demand remains unexplained. Suggest and justify other explanatory variables that might be added to this equation in order to increase the explanatory power of the demand equation. ödtuciass.illetu.eu Aslı just started working as an investment advisor and she is analyzing the three bonds givern below. She looks at the calendar and realizes that today is April 1, 2019. Aslh is thinking about investing in these bonds for her clients so she has to calculate the price of these bonds. Sinc she has just started working as an advisor, she is not very good at it. Therefore, she asks your help for Bond 3 2T Co Bond 2 Orange Inc January1, 2016 October 1, 2015 10 vears 8% Bond Treasur January , 2019 270 days (9 months) 5 % comp. month! Issued b Issued at TTM YTM Coupon frequency Coupon rate Par Value 15 years 12% Semi-annual 10% $1,000 uarterl 1000 $1,000 Zero coupon bond 10,000 a. Calculate the price of Bond 1, Bond 2 and Bond 3 today (on 1st of April 2019) b. If today is July 1, 2021 and the yield to maturity for Bond 2 is still 8% then calculate its price today C. If the yield to maturity becomes 10% one year later on the July 1, 2022 then calculate the d. If today is October 1, 2022 and Bond 3 is selling for $1,116.523 then calculate its yield to e. On Apri 1, 2027 at the press conference the vice director of central bank announces that current yield and the capital gains yield of Bond 2 maturity they expect inflation rate to decrease. Briefly discuss how this information will affect the price of Bond 3

Answer 1

Bond 1 treasury January 1 2019January 1 2016 october 1 2015 9 months bond 3 2t corp bond 2 2 Isuued by 3 issued at 4 TTM 5 YTM 6 Coupon frequency 7 coupon rate 8 par value ornage inc 10 15 0.12 0.05 0.08 semi-annual quarterly ero coupon bond 10000 1000 1000 10 a) 11 price on 1 April 2019 12 13 effective annual rate 14 time to maturity 15 time to maturity (years) 16 price of bond 17 b 18 today 19 time to maturity 20 price Bond 1 bond 3 bond 2 0.051161898 0.08 6.75 6.75 1,103.53 0.12 11.5 11.5 876.97 6 months 0.5 9,753.61 01-Jul-21 4.5 1,074.96 22 yield to maturity 23 time to maturity (years) 24 price of bond 25 current yield 3.5 1,000.00 10.00%

13 effective annual rate 14 time to maturity 15 time to maturity (years) 16 price of bond 17 b 18 today 19 time to maturity 20 price 0.051161898 0.08 6.75 6.75 1,103.53 0.12 11.5 11.5 876.97 6 months 0.5 9,753.61 01-Jul-21 4.5 1,074.96 22 yield to maturit 23 time to maturity (years) 24 price of bond 25 current yield 26 capital gains yield 27 d 28 today 29 price of bond 30 time to maturity (years) 31 yield to maturity 1,000.00 10.00% 0.00% 01-Oct-22 1116.523 8.00%

bond 2 ornage inc January 1 2016 10 0.08 quarterly bond 3 2t corp october 1 2015 15 0.12 semi-annual Bond 1 treasu January 1 2019 9 months 0.05 2 Isuued by 3 issued at 4 TTM 5 YTM 6 Coupon frequen 7 coupon rate 8 par value ero coupon bond 10000 1000 1000 10 a) 11 price on 1 April 2019 12 13 effective annual rate 14 time to maturity 15 time to maturity (years) 16 price of bond 17 b 18 today 19 time to maturity 20 price bond 2 bond 3 -D5 11.5 11.5 Bond 1 ((1+(B5/12)) 12)-1 6 months 6+(9/12 C14 12 --PV(C13/4,C15*4,(C7*C8/4),C8) PV(D13/2,D15*(D7*D8/2),D8) --PV(B13,B15,0,B8) 44378 4.5 --PV(C5/4,B19*4, (C8 C7/4),C8) 22 yield to maturit 23 time to maturity (years) 24 price of bond 25 current yield B19-1 --PV(B22/4,B23*4,(C8*C7/4),C8) (C7*C8)/B24

((1+(B5/12)) 12)-1 6 months 13 effective annual rate 14 time to maturity 15 time to maturity (years) 16 price of bond 17 b 18 today 19 time to maturity 20 price -C5 -D5 11.5 11.5 6+(9/12) C14 --PV(C13/4,C15*4,(C7*C8/4),C8) PV(D13/2,D15*(D7*D8/2),D8) --PV(B13,B15,0,B8) 44378 4.5 --PV(C5/4,B19*4, (C8 C7/4),C8) 22 yield to maturity 23 time to maturity (years) 24 price of bond 25 current yield 26 capital gains yield 27 d 28 today 29 price of bond 30 time to maturity (years) 31 yield to maturity 32 B19-1 --PV(B22/4,B23*4,(C8*C7/4),C8) (C7*C8)/B24 B22-B25 44835 1116.523 2 RATE(B30*2,(D7*D8/2),-B29,D8)