INV3702 ASSIGNMENT 2 Semester 1

INV3702 ASSIGNMENT 2 Semester 1 S - The study-notes marketplace Downloaded by: commerceace | Distribution of this document is illegal S - The study-notes marketplace 1 QUESTION 1 Determine whether Bond E is overvalued, undervalued or fairly valued. All coupons are paid annually. S - The study-notes marketplace Downloaded by: commerceace | Distribution of this document is illegal S - The study-notes marketplace 2 The price of the 3-year coupon bond (as a percent of par) is: N = 3; I/YR = 2.711; PMT = 5; FV = 100; Compute PV = –106.51 The no-arbitrage price of the 3-year coupon bond based on spot (zero-coupon) rates is: 106.51 Therefore the 3-year coupon bond's price equals its no-arbitrage value, therefore the bond is fairly valued.