Bond Pricing

Question 1 (Bond Pricing – 5 marks)
Upon graduation from the UTS Business School, you’re now working for a superannuation fund. On your rst day at work, your boss has asked you to calculate the prices of the treasury bonds that are currently traded in the market based on the current yield curve, and also nd their yield-to-maturities (YTMs).
(a) Based on information provided for the treasury bonds and the ZCYs, plot the yield curve and describe the general shape of the yield curve, and compute the bond prices (accurate to 4 decimal places).
(1 mark)
(b) Based on the bond prices in part (a), calculate the yield-to-maturity (YTM) p.a. (semi-annually compounded) for each of the treasury bonds. Plot the YTM curve with respect to the maturity and comment on its relation to the yield curve in (a). Note:
you will need to use GoalSeek or Solver in Excel to nd the YTMs.
(2 marks)
(c) Suppose there is a zero-coupon bond (ZCB) with a face value of $100 and 2 years to maturity, which currently trades at $95. Construct an arbitrage portfolio by trading in the ZCB and also in the rst four treasury bonds to show how you can make an arbitrage pro t. You need to indicate your portfolio in terms of weights and dollar amounts of the bonds and explain your answer.
(2 marks)