Bond Valuation

Greenwich  Research  Plcissued  in  22.11.2012  a  10-year,  3.85%  coupon  bond  with coupons paid semi-annually. The bond issue is rated as A- and has a default spread of 1.65%. The Treasury yield rates are presented in the table below.

Treasury Yield curve

Maturity6-1-2-3-5-7-10-20-30-

month year year year year year year year year

Yield Curve Rates 2.19% 2.49% 2.75% 2.96% 3.10% 3.24% 3.55% 4.62% 5.45%

Calculate:

1.The fair price of the bond.

2.Macaulay and Modified Duration

3.The Duration approximation for different YTM's.

4.Convexity

5.Duration and convexity approximation for different YTM's.

6.Plot  for  different  YTM's  the  Annual  Percentage  change  in  price,  the  Duration approximation and the Duration with convexity approximation

Hint: A default-free theoretical spot rate curve can be constructed from the observed Treasury yield curve by interpolation method.

Question2(700 Words)

Essay

"Exchange-traded funds (ETFs) are considered a cost-efficient way to access a multiplicity  of  investment  exposures  and  hence  have  increased  popularity  among investors  after  their  first  introduction  on  the  New  York  Stock  Exchange  in  1993"

(Mateus and Rahmani, 2014)

Critical discuss the existing literature on ETFs focusing on:

1. Replication accuracy (Physical vs. Synthetic ETFs)

2. The role of expense ratios, size and liquidity on tracking errors

Mateusand Rahmani(2014)"Physical versus Synthetic ExchangeTraded Funds. Which One Replicates Better?", Journal of Financial Risk Management, forthcoming

Question 4

Essay

"Exchange-tradedfunds(ETFs)areconsideredacost-efficient way to access a multiplicity  of  investment  exposures  and  hence  have  increased  popularity  among investors  after  their  first  introduction  on  the  New  York  Stock  Exchange  in  1993" (Mateus and Rahmani, 2014)

Critical discuss the existing literature on ETFs focusing on:

1. Replication accuracy (Physical vs. Synthetic ETFs)

2.The role of expense ratios, size and liquidity on tracking errors

MateusandRahmani(2014)"PhysicalversusSyntheticExchangeTradedFunds.

Which One Replicates Better?", Journal of Financial Risk Management,forthcoming