Fixed Income Practice Set: Yield Curves, Bond Pricing, and Immunization, Assignments of Finance

Download Fixed Income Practice Set: Yield Curves, Bond Pricing, and Immunization and more Assignments Finance in PDF only on Docsity! Fi8000 – Practice Set #4 1 Problems 1 through 6: Use the Rates Spreadsheet posted on the website to answer questions 1 through 6. Be sure to read the instructions for the Rates Spreadsheet before using it. 1. Use the Yield worksheet to answer the following questions. a) Adjust the spot rates so that they increase each year by 0.5%, starting at 6.0%. What is the shape of the yield curve? b) Adjust the spot rates so that they decrease each year by 0.5%, starting at 10.0%. What is the shape of the yield curve? c) Adjust the spot rates so that they increase from 8.0% in year 1 to 11.0% in year 4. Then, decrease the rates by 1.5% each year, starting with 9.5% in year 5. What is the shape of the yield curve? 2. Use the Forward worksheet to answer the following questions. a) Adjust the yields so that they increase each year by 0.5%, starting at 5.0%. What is the pattern of forward rates through time? b) What pattern of forward rates gives a humped yield curve? To answer this, adjust the yields in order to get a humped yield curve. c) What pattern of forward rates results in a yield curve that starts at 10% and decreases to 6.5% in the last year? d) Why would a yield curve's slope tend to become flatter through time? For example, try making a fairly steep downward sloping yield curve and see what forward rates are necessary for this. 3. Use the Price and Duration worksheet to answer the following questions. a) How does the price graph as a function of the coupon rate change as the yield to maturity increases? This price graph is the blue graph in the upper right-hand corner). b) How does the price graph as a function of the maturity change as the yield to maturity increases? This price graph is the red graph in the lower right-hand corner). c) How does the price of the bond change as the yield to maturity increases? This price graph is the green graph in the lower left-hand corner). d) How does the price graph as a function of the coupon rate change as the maturity increases? This price graph is the blue graph in the upper right-hand corner). Does the answer depend on whether the bond is selling for a premium or a discount? e) How does the price graph as a function of the yield to maturity change as the maturity increases? This price graph is the green graph in the lower left-hand corner). Does the answer depend on whether the bond is selling for a premium or a discount? f) How does the price of the bond change as the maturity increases? This price graph is the red graph in the lower right-hand corner). Does the answer depend on whether the bond is selling for a premium or a discount? g) How does the price graph as a function of the maturity change as the coupon rate increases? This price graph is the red graph in the lower right-hand corner). h) How does the price graph as a function of the yield to maturity change as the coupon rate increases? This price graph is the red graph in the lower left-hand corner). i) How does the price of the bond change as the coupon rate increases? This price graph is the blue graph in the upper right-hand corner). 4. Use the Price and Duration worksheet to answer the following questions. a) How does the duration graph as a function of the coupon rate change as the yield to maturity increases? This price graph is the blue graph in the upper right-hand corner). b) How does the duration graph as a function of the maturity change as the yield to maturity increases? This price graph is the red graph in the lower right-hand corner). c) How does the duration of the bond change as the yield to maturity increases? This price graph is the green graph in the lower left-hand corner). d) How does the duration graph as a function of the coupon rate change as the maturity increases? This price graph is the blue graph in the upper right-hand corner). Does the answer depend on whether the bond is selling for a premium or a discount? e) How does the duration graph as a function of the yield to maturity change as the maturity increases? This price graph is the green graph in the lower left-hand corner). Does the answer depend on whether the bond is selling for a premium or a discount?