Question 1 A B are the math questions
Question #1 (7/10 points)
The yield curve below is based off of yields from risk-free government securities.
- (2 marks) Using the yield curve in the graph, determine the price of a 3-year government bond with a face value of $1,000 and semi-annual coupons at a rate of 5% per annum. Show your work for partial credit.
- (3 marks) You see a 4-year government bond with the same face value and coupon rate. This bond is trading at a price of $837.09. What is the 4-year yield? No guessing! Show work or receive no credit.
- (2 marks) Assume you want to price the 4-year bond using the PVAF. How inaccurate would your price be using the PVAF? Use both 1) the mean and 2) the median of the eight yields in the PVAF.
Question #2 (3/10 points)
- (1 mark) You are a trader and believe in the efficient market hypothesis (EMH). Argue why you think ratings companies are unnecessary with respect to the EMH. (Maximum 200 words)
- (2 marks) Now you are a ratings agent. You also believe in the EMH, but want to keep your job. How would you argue that ratings companies are important, even with the EMH? Discuss how you can reconcile your job with the EMH considering the different forms of the EMH. (Maximum 200 words)