gysTem NEPAL 92 FOUNDATIONS OF FINANCIAL So @ Numerical Problems Cc ry bil sued 1 ch is selling for RS 95s Mgt Toacider a Scdays Treasury Pl me Discount read value is Rs 100,000 : eldon T-bil 4.” What iodays dou ere Whats the anual discount ati 90 days yield or HPC cas ee aa valent itd oe “tis A T-bill with face value Rs 10,000, ‘and 91-day ‘maturity sells at a discount jj) Cc Picutracoml percen. ce seldom Foil” whats the price ofthe ill? cae ee riod return ofthe bil e bb. Whats the 91-days holding Pe ‘c. What isthe bond equivalent dd. What i the effective annual ye a orinvestment rate ofthe bills? 1d of bill? asf) Fs 949829 () 10 y for Rs 495,000. The ate th bay commercial paper of a compat oad ais 45 day’ from the maturity. Cale feld on the commercial paper Suppose you car Teldon a face value of commercial pare" yield and bond equivalent Yi Se agieement in which agrees to buy Treasur ‘of Rs 25,000,000 with a promise | late the yield on the Kepo if it b TA bank enters a repurcha Tied on Re from a correspondent bank at a price back at a price of Rs 25,005,000. Calcul Tas investment of Re 420 million in securities, K The ABC closed-end fund es outstanding, It trades at a 10 percer Sejaueraie in lables, and 20 milion sha Glerrew pret fom NAV. ‘a. What is net asset value ofthe fund? bb. Whats the current price ofthe fund? The Mechi Equity Fund has sokd 150,000 shares to investors. Currently, the i Lae ar accrued investment management fee obligations of Rs 50,000. The fund's pert | Shown below. Calculate the fund's net asset value. peRUPEPERE A mutual fund has 1,000 shares of XYZ Co, currently trading at Rs 150.0"? Nerasietvaiwe shares of ABC Co, currently trading, currently trading at Rs 140, The fund has issued 10,008 shar a. What is the NAV of the fund? “" b. If investors expect the price of the XYZ C 2 of the XYZ. Co's shares to incre: ‘ABC Co, shares to decline Rs 110 by the ens ADC Ca sto the end of the year, what is tI ¢. What is the maximum by which the pr ia the maximum by whlch the price of ABC Ca, can detine 10 mH . se to Rs 180 and sxpected NX Am (a) RA pr share 0) #9FINANCIAL INSTRUMENTS AND INTEREST RATES. 93 Fhe real Fikfree rate of interest is 3 percent. Ifa lation is expected to bed Se cas, 4 percent in the second year and 6 percent in the Saar ae ss : pe the third year, Assume that the Meaccoe Peyote premium is 80 4 Whats the yield on 2-year Treasury securities? bh What i the yield on 3-year Treasury securities? «c_ Why yield on 3-year securities is larger than that of 2-year securities? BS cent in year 1 6 percent in year 2 5 percent thereafter, Assume aso that al ert freasury bonds are highly liquid and free of default risk. If 2-year and 5-year von ‘Treasury bonds both yield 12 percent, what is the difference in the mana a premiums (MRPs) on the two bonds? Why maturity premium on longer-term bonds ishigher? Tiere Takcce rate s 2 percent. Inflation is expected to average d percent a year -ine next four years. After that inflaton is expected to average 4 percent a year ‘An 6year corporate bond has yield of 9 percent. Assume that there is no maturity wo risk premium but liquidity risk premium on the corporate bond is 1 percent. What is the default risk premium on the corporate bond? Facume that Iris now January 1, 2022. The rate of inflation is expected to be # esa cent throughout 2022. However, increased government deficits and renewed in the economy are then expected to push inflation rates higher. Investors to be 5 percent in 2023, 6 percent in 2024, and 7 percent in mntly is 2 percent. Assume that no maturity risk Tee the ation ate 2025, The real risk-free rate currei premium is required on bonds with 5 years or less to maturity. The current interest rate on 5-year T-bonds is 8 percent. 4 What is the average expected inflation rate over the next 4 years? bb What should be the prevailing interest rate on 4-year T-bonds? in 2026, or year 5, given that bonds, which «Whats the implied expected inflation rate ‘mature in that year, yield 8 percent? Ars: 396 0) 759 (6 #6 CE SERIEI Fie sea ak ice rate of interest is 3 percent; and itis expected to remain constant far for the next 3 years and 4 ‘Svat ove time, Inflation is expected to be 2 percent per yes percent for the next 5 years. The maturity risk premium is equal to 0:1%(!-1), where t= bond’s maturity. The default risk premium for a B-Grade corporate bond is 3 percent 4 Whatisthe average expected inflaton rate over the next 4 years? Whats the yield on a 4-year Treasury bond? © What sth yield on a 4-year B-Grade corporate bond with a liquidity premium of 05 Percent?94 ‘OUNDATIONS OF FINANCIAL SYSTEM IN NEPAL 4. What is yield on an 8-year Treasury bond? ‘What is the yield on an 8-year B-Grade corporate bond with a liquidity pre, 05 percent? 6 Ue the yield on a 9-year Tre sur bond is 7.3 percent what does tating ‘xpected inflation in year 9? Its now the end of year percer E 2021. Suppose thatthe rate and many ra Premium vig of inflation Ts expectary m nt throughout 2022, ment deficits and rene, to push inflation rates higher Inver = 106 percent in 2023, 7 percent in 202, 8p in 2026, and 10 percent in 2027 that no maturity risk to maturity However, increased gover gor in the economy are then expecte expect the 2025, 9 percent inflation rate increases and remains at this level til am Premium i required on bonds with less than 5, However, under liquidity preference hypothesis, the maturs flor exPested to increase by 0.2 percent each year starting from 02 a limit of 1 of interest is currently 4 percent 10-year bond, Assume 2 percent (fr 10 years bond). The real rsk-ha CCleuate the interest rate on 1-3 (for 5 years bond) up to Assume that the real risk ree Tate i how . at the same level for the foreseeable future moneiyrak 42 percent, year 2s 46 5 percent, whichis expected fo mu The rate of inflaton expected in year Percent, year 3s 49 percent and year i 5.1 percent. A taturity risk premium expected for securities with never, the a assume that there is no ‘proniomend 4 Years of maturities. Ho 8. What is the yield on 4-year Treasury securities? ». A corporate bond with 4 years to maturity i currently liquidity risk premium om the corporate bond eiing 1.5 percent and ts above Treasury bond is 075 per he corporate bond? ‘What isthe default risk premium associated «Now assume that a S-year Treasury bond is yiktng 98 percent with» maturty sh premium of 1.30 percent, what ithe implied rat of ination during year earFINANCIAL INSTRUMENTS AND INTEREST RATES. 95, ‘AS year Treasury bond has a 5.2 percent yield. A 10-year Ti Rte erg ee Gn Faflation will average 25 percent over the next 10 years, Assure ne are at a ee Syn care tae ment liquidity premium as the 10-year corporate bond described. What premium and nr ty bond yields a oF “Assume that the real risk-free rate is 4 percent and that the maturity risk pre a forward rate expected for year two. com Tnerest rates on tyear Treasury securities are currently 7 percent, while interest ae ates on 6-year Treasury securities are currently 7.5 percent. Ifthe pure expectation theory is correct, what does the market believe that 2-year forward rate on the securities 4 years from now? fons Co Fisk free rate is 35 percent and default risk premium Is zero Lay he nominal rate of interest on 1-year bond is 5 percent and that on comparable risk st" >.year bond is 6 percent and a 3-year bond is 9 percent, which includes the maturity risk premium of 15 percent. the expectation theory, forecast the forward rate on a T-year bond during the a. Using, third year. b. What is the expected inflation rate in year one, two and three? & Comment on the causes why average interest rate is different from interest rate in year two and three. Ans () 7 OI% hy 130% 0) 13% 36 7086 Tent and the current yield on a bond ard yield on a bond with 1 year to lly, the forward rate Four years bonds are currently yielding 7 pe “sewer with 1 year to maturity is 6 percent. The forw: maturity one year from today is expected to be 9 percent. Fi na bond with 1 year to maturity two years from today is expected to be 8 Percent 4. What is the expected yield on a bond with 1 year to maturity three years from today? b. What is the annual expected yield on a two-year bond issued two years from today? Ars: (a) $096 (0) 651%96 _ FOUNDATIONS OF FINANCIAL SYSTEM IN NEPAL Implied forward Teflaion prom nd mari risk Given the following Government bond yield information From September 20%, Nepal Rasta Bank Economic Review, calculate the 2-year forward rate stati year two. 2years Syears Tisnow the end of 2021, Inflation currently is about 3 percent. The government taj ‘action to maintain inflation at this level throughout 2021. However, the economy ; in a recovery, and economic reports indicate that inflation is expected to increas luring the next 5 years. Assume that the expected inflation rate will be 5 percent fy 2022; 6 percent for 2023, 8 percent for 2024, and 4 percent for every year thereafter, a. What will be the average expected inflation rate over the 5-year period 2022-20267 >. What average nominal interest rate over the S-year period would be expected produce a2 percent real risk-free rate of return on 5-year Treasury securities? ih | Assume a real risk-free rate of 2 percent and a maturity risk premium which star (0.1 percent and increase by 0.1 percent each year. Estimate the interest rate in Janu: 2022 on the bonds that mature in 1, 2,5, 10 and 20 years? it 4. Plot your computed figure of interest rate to draw a yield curve. Neg Describe the general economic conditions that could be expected to produc + Bilan the prrard sloping yield curve. rors - Aes (a) $496 (0) 7.496 Fe) FI TIM DIRK: 7.7%. 4 + eayze th MRIS 5 po 900 cre he Towing Tsar bond yield information ina ow SME based financial publication: 7 a oe [Benny wean, 7 2 , “ty 5 Eo 3 5 Sar] IB + eon te Using given yields, calculate the following = 1s repuatons 0 a. The 1-year rate1 yearfrom now. b, y ‘The 1-year rate 2 years from now, The T-year rate3 years from now. The Lear rate 4 years fro TheS-year rate 2 yes fe. The4-yearrate1 yearfromnow. — £ ars from now, g The 2-year rate3 years from now OKA 806105 HCO STI S540