MATH3801 ASSIGNMENT 1

SEMESTER I 2019/2020

Due: Friday, October 11th, 2019 by 3:00 pm

Hand in at the Mathematics Office c/o Britta Hay

This assignment is worth 5% of your grade.

Instructions:
• This assignment is to be done in teams of five or fewer.
• ID numbers for all team members must be shown on the completed assignment.
• Show all work.

Question
You are given the following information about a bond:

Face value $1,000

Coupon rate 8% semiannual
Redemption Value $1,200
Tenor 5 years

This bond is purchased to yield an annual effective rate of 6%.

(i) Calculate the price of the bond.

(ii) Show that the premium or discount can be calculated using an annuity factor.
(iii) Show that the book price of the bond at the end of two years can be expressed as the present
value of its future cash flows, calculated using an appropriate discount rate.
(iv) Plot a graph of book value against time, using the book values at coupon dates (after coupon
payments).

You may show the answers for (ii) and (iii) either by proving that the equation is true for all bonds
(using symbols for the items above) or by calculating each side of the equation for the bond
described above.

Note: you must show all work. For example if you only state a book value, without showing how
you arrived at that book value, you will not earn full marks.

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