Investment Analysis and Portfolio Management (FIN630) assignment solution

Semester “Spring 2010”

“Investment Analysis and Portfolio Management (FIN630)” 
This is to inform that next Assignment (covering video lecture no. 1 to lecture no 28) 
will be uploaded on VULMS according to the following schedule

Schedule

Opening Date and Time 
June 28, 2010 At 12:01 A.M. (Mid-Night)

Closing Date and Time 
July 02, 2010 At 11:59 P.M. (Mid-Night)

Note: Only in the case of Assignment, 24 Hrs extra / grace period after the above mentioned due date is usually available to overcome uploading difficulties which may be faced by the students on last date. This extra time should only be used to meet the emergencies and above mentioned due dates should always be treated as final to avoid any inconvenience.


Important: 

1. For acquiring the relevant knowledge, do not rely only on handouts but watch the course video lectures, which can be downloaded for free from www.youtube.com/vu, and also use other reference books. 
2. For planning your semester activities in an organized manner, you are advised to view schedule of upcoming Assignments, Quizzes and GDBs in the overview tab of the course website on VU-LMS
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The Right Answer of first question is:

If a bond is selling at discount than the relationship between coupon rate.current yield and yield to Maturity would be :

Coupon Rate < current yield < yield to Maturity

or

Yield to Maturity > current yield > coupon rate



A bond will sell at a discount when __________.

The coupon rate is greater than the current yield and the current yield is greater than yield to maturity

The coupon rate is greater than yield to maturity

The coupon rate is less than the current yield and the current yield is greater than the yield to maturity

The coupon rate is less than the current yield and the current yield is less than yield to maturity


Rationale: In order for the investor to earn more than the current yield the bond must be selling for a discount. Yield to maturity will be greater than current yield as investor will have purchased the bond at discount and will be receiving the coupon payments over the life of the bond.
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Q no.1. What will be the relationship among coupon rate, current yield, and yield to maturity for bonds selling at discounts from par? (Marks=2)


If bond is selling at discount then :

Coupon rate < Current Yield < Yield to maturity


You can convert this equation in your own wordings.


Q no.2. Illustrate the aforementioned relationship and provide supporting calculations using the 8% (semiannual payment) coupon, 30-year maturity bond with par value of Rs.1,000 paying 60 semiannual payments of Rs 40 each assuming it is selling at a yield to maturity of 10%. (Marks=8).


If we treat it as annuity then this formulas will be used:






Bond Price = C*{1-(1/1+r)2*n)/r} +par/(1+r)2*n





=40*{1-(1/1+.05)60/.05 +1000/(1+.05)60

= 40*(1-0.054/.05) +1000/ 18.68

=40*18.92 + 53.533

=756.80 =53.533

= 810.33



Current yield = par or face value*coupon rate/price

= 1000*.08/81.33

= 9.86


It was to prove that if bond is selling at discount then YTM is greater than current yield and current yield is greater than coupon yield , so it is proved from above calculations that:


Coupon rate < current yield < YTM

8% < 9.86% <10%
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