Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance Security Analysis-I - Question Paper
Monday, 17 June 2013 12:20Web
Page 19 of 21
99.46
Capital gains
–115.53
–104.60
–92.62
–79.34
–64.80
Total return
–25.53
84.4
205.28
338.35
484.66
d. We can see the combined effect of varying the holding period and, and the reinvestment rate, on the total return. It can be observed that 2 opposing forces work on the return. A fall in interest rates decreases interest on interest, while increasing the capital gains or decreasing the capital loss. This is due to the inverse relationship ranging from YTM and the market prices.
< TOP >
3. a. P =
P = 6.63 + 6.22 + 5.83 + 83.40
= Rs.102.08
YTM of the bond A
102.08=
At K = 7%
LHS = 100
At K = 6%
LHS =103.47
By trial and fault method, YTM is 6.40%.
Year
CFt
PV @ 6.4%
PV (CF)
t2 + t
(4) (5)
(1)
(2)
(3)
(4)
(5)
(6)
1
2
3
4
4
7
7
7
7
100
0.9398
0.8833
0.8302
0.7802
0.7802
6.58
6.18
5.81
5.46
78.02
2
6
12
20
20
13.16
37.08
69.72
109.20
1560.40
Total
102.05
1789.56
Convexity =
1789.56 0.8833 = 1580.72
Therefore convexity = = 15.49.
Price change due to convexity = 1/2 Price Convexity (Change in Yield)2
Therefore Price change for 0.75% change in yield
= ½ 102.05 15.49 (0.0075)2
=4.45%.
Price of the bond B
P =
= 8.05 + 7.56+ 7.08+ 6.62+ 6.18+ 73.44= Rs.108.93
Yield to maturity of the bond B
108.93 =
at = K = 6%
L.H.S. = 112.30
at = K = 7%
L.H.S = 107.18
YTM = 6% +
= 6.66%.
Year
CFt
PV @ 6.66%
PV (CF)
t2 + t
(4) (5)
(1)
(2)
(3)
(4)
(5)
(6)
1
2
3
4
5
6
6
8.50
8.50
8.50
8.50
8.50
8.50
100
0.9376
0.8790
0.8241
0.7747
| Earning: Approval pending. |
