Discussion Questions: 10 points each 1. Discuss coupon rate and maturity as to t
ID: 2562300 • Letter: D
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Discussion Questions: 10 points each 1. Discuss coupon rate and maturity as to their effect on price volatility and duration. 2. Discuss Required Rate of Return as to its two parts of Base Interest Rate and Risk Premium 3. Discuss constructing a theoretical spot rate curve known as bootstrapping with the known rates for six month and one year treasury bills and the prices in the market for securities maturing longer than a year. You must use the mathematical expression of (1+ 2) in your answer. 4. Discuss and explain how to compute what the rate must be six months from now in order to determine whether to invest six months and renew for six more months or invest for a year. You must use the expression (1 + z) in your answer. 5. Explain the three functions of an investment banker.Explanation / Answer
Answer(1)- Coupon Rate- Coupon rate is the yield, paid by the fixed income securities like bond. It is quoted on the face of bond. It is presented in percentage. It is the rate through which annual coupons are paid.
Maturity- It is the date on which final payment is made of a loan, bond or other financial instrument.
Bond's yield to maturity tells how much it will earn if kept till maturity. If Government bond is offering 4% and market rate comes down to 3% but Govt. bond will pay 4% only. So if you sell Govt. bond early, you will see the price is higher than before. Bond's coupon rate and maturity affect the bond's prices.
Answer(2)- Required rate of return- It is the minimum rate on investment.
Base Interest rate- It is the minimum interest rate, set by commercial banks in the country.
Risk Premium- It is the extra return, paid by an investment over the risk free return. Risk free rate of return is paid by Government securities. Any investment that is paying higher than risk free return, that difference between Market return and risk free return is called Risk premium.
Answer(5)- Three functions of Investment Banker- Are as folllowing-
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