Finance
Essay by colinxie1996 • October 2, 2017 • Course Note • 268 Words (2 Pages) • 1,015 Views
UK GILTS – Analysis of Bond Investments
Group Members: Colin Xie, Ling Lv, Haolan Zhou, Juno Zhang, May Liu
Using the spreadsheet provided with the case, please answer the following questions. Label the worksheets Q1, Q2, etc.
1. What is the difference between the coupon rate and yield to maturity on a bond? How does the difference affect bond prices?
Coupon rate is a fixed percent of par value that is paid by the bond issuers annually; yield to maturity is the percent return on the bond annually. If coupon rate is less than yield to maturity, the bond price is below its par value; if the coupon rate is greater than yield to maturity, the bond price is above its par value.
2. Using Exhibit 1 in the case, fill in the missing values assuming annual payments. Plot the yield curve that results from the bonds in the case.
The following spreadsheet and plot show the price, the YTM and yield curve of the UK GILTS with annual payment.
Annual Payment | ||||
Years | Price | YTM | Coupon | Maturity |
1 | 102.5 | 0.73 | 3¼% | 1 year |
2 | 106.8 | 1.74 | 5¼% | 2 years |
3 | 107.02 | 2.06 | 4½% | 3 years |
5 | 98.85 | 3 | 2¾% | 5 years |
7 | 108.91 | 3.54 | 5% | 7 years |
10 | 97.65 | 4.04 | 3¾% | 10 years |
20 | 104.93 | 4.38 | 4¾% | 20 years |
30 | 102.31 | 4.36 | 4½% | 30 years |
50 | 94.96 | 4.24 | 4% | 50 years |
[pic 1]
3. Repeat the process assuming semi-annual payments.
The following spreadsheet and plot show the price, the YTM and yield curve of the UK GILTS with semi-annual payment.
Semi-Annual Payment | ||||
Years | Price | YTM | Coupon | Maturity |
1 | 102.50 | 0.74 | 3¼% | 1 year |
2 | 106.87 | 1.74 | 5¼% | 2 years |
3 | 107.02 | 2.07 | 4½% | 3 years |
5 | 98.84 | 3.00 | 2¾% | 5 years |
7 | 108.91 | 3.55 | 5% | 7 years |
10 | 97.63 | 4.04 | 3¾% | 10 years |
20 | 104.93 | 4.38 | 4¾% | 20 years |
30 | 102.33 | 4.36 | 4½% | 30 years |
50 | 94.96 | 4.24 | 4% | 50 years |
[pic 2]
4. Assuming annual coupon payments, what happens to the bond's price (i.e., % price change) if all the yields move up by 1%?
The following spreadsheet shows the price change percentage after the yields move up by 1%.
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