FIN630 Assignment 1 Solution and Discussion
Due Date: January 21, 2020
After going through this assignment, the students should be able to:
• Calculate the percentage change in bond prices
• Evaluate the bond on the basis of bond volatility Question:
Bond prices fluctuate in the secondary market just like any other security. The main cause of changes in bond prices is changing interest rates. When interest rates rise, bond prices fall, and when interest rates fall, bond prices rise. However, how much bonds change in price with interest rates depend on different factors. Following are the details of two bonds issued by ABC Company. The company is interested in identifying the impact of interest rates on bond prices so in future better decision could be taken in the best interest of the company and investors.
A 5%, 15 years bond was issued in year 2019. Market rate for such type of bond is 4.5% semi- annually. Coupon payments are made semi-annually and par value is Rs.1, 000
A 5%, 15 years bond was issued in year 2019. Market rate for such type of bond is 5.5% semi- annually. Coupon payments are made semi-annually and par value is Rs.1, 000
Calculate the bond volatility in each case. What is the impact of increase in interest rate on the bond volatility? You are required to provide complete calculations and working.
• Make sure to upload the solution file before the due date on VULMS.
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RULES FOR MARKING
Please note that your assignment will not be graded or graded as Zero (0), if:
• It is submitted after the due date.
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• Provide complete working and reasoning in each case otherwise you will lose marks.
• Irrelevant details are not required.
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