Calculate each bond's Macaulay Duration, Modified Duration and the Convexity Measure. Note, you must calculate the full market price of each bond to arrive at the duration and convexity figures (do not back out accrued interest).

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Questions 1 (30 marks)

Please answer Case 2, Deutsche Bank: Finding Relative Value Trades. 

Using the excel workbook, calculate the corresponding bond equivalent zero rate for each bond (from 02/14/2004 to 08/15/2029, excel tab Exhibit 1) and  compare the calculated zero rates to Deutsche Bank's model prediction (excel tab Exhibit 4). 

Under the Exhibit 4 tab, please add 2 columns and put your results in a table (see table below).  Clearly identify any mispricing.

Exhibit 4: Output from Deutsche Bank's Zero-Coupon Yield Model

Maturity (years)

Model Prediction

(BEY)

Bootstrap results

Pricing Difference

 (in bps)

 

 

 

 

1y

1.2443%

 

 

2y

1.8727%

 

 

3y

2.4110%

 

 

4y

2.9665%

 

 

5y

3.4454%

 

 

6y

3.8557%

 

 

7y

4.1996%

 

 

8y

4.4677%

 

 

9y

4.6528%

 

 

10y

4.7107%

 

 

15y

5.7160%

 

 

20y

5.9517%

 

 

25y

5.9315%

 

 

 

Questions 2 (5 marks)

On March 2nd, 2020 the 5-year GoC bond with a coupon of 3% was quoted at a clean price of 99.562. The GoC 3% bond has a September 1st, 2024 maturity date.

 

A bond dealer purchased the bond for settlement on March 3rd, 2020.  He would also like to finance the bond trade for 1 day (so repo the bond out for 1 day).  The repo settlement date is March 4th, 2020.  The repo rate for a term of 1 day is 1.479%. There is no 'hair cut' on this transaction. 

 

Using this information, what is the total money borrowed by this dealer on March 4th, 2020?  Be specific as it relates to all the components of the trade (accrued interest, repo term interest, total settlement value).  Show all of your work and assume a actual/365 day count convention.

 

Question 3 (15 marks)

Part A) (13 marks) Consider the following 3 bonds:

1.     US Gov't Treasury Bond 2.375% due May 15, 2029 trading at a yield to maturity of 0.621%.  Assume a settlement date of May 22nd, 2020.

2.     US Gov't Strip (Zero) Bond due May 15, 2029 trading at a YTM of 0.718%.  Assume a settlement date of May 22nd, 2020.

3.     Loblaws Corp. Bond 6.50% due January 22, 2029 trading at a YTM of 2.534%.  Assume a settlement date of May 26th, 2020.

Calculate each bond's Macaulay Duration, Modified Duration and the Convexity Measure.  Note, you must calculate the full market price of each bond to arrive at the duration and convexity figures (do not back out accrued interest). 

Assume that for the US treasury bonds (a and b) the actual/actual day count convention applies.  For the actual/actual day count convention use the actual days in the 6 month period for the denominator (for example: 181 days).  For bond c) assume the actual/365 day count convention.

Part B) Using your results from Part A above, which of the three bonds is the least sensitive to interest rates? Why is this the case?

Question 4 (5 marks)

Disney 7.55% bond due July 15, 2093

Coca Cola 7.375% bond due July 29, 2093

In the table above, you are given two issues of 100 year bonds: DIS 7.55% due 07/15/93 (from Case 3) and KO 7.375% due 07/29/93.  By way of background, Coca Cola also issued a 100 year bond based on the success of the Disney offering back in 1993. However, the transactions were structured differently.

Please explain in words (no calculations required) why the duration of the Disney bond is much lower than the duration of the Coca Cola bond.  Frame your response with regard to investor expectations for each of  these bonds. Hint: read Case 3 and focus on the documentation associated with the Disney bonds

 

 

 

Question 5 (10 marks)

 

On September 6, 2013, Loblaw Companies Ltd. issued $800 million 3.748% bonds due in 2019 and $800 million 4.86% bonds due in 2023.  The proceeds of the bond issues were used to pay for the acquisition of Shoppers Drug Mart.  As of March 22, 2014 (Q1) Loblaws still had $1billion of a bank credit facility that was undrawn (and originally associated with the Shoppers acquisition). You may add this to total debt.

 

Note: do not adjust any items regarding interest expense including Choice Properties or securitization of credit card receivables, use the figures as provided on the statements.

     a)        (5 marks) Using the Loblaw Companies' 2013 annual report, and the first quarter financial report (posted on Quercus) construct the Last Twelve Months (LTM) Consolidated Statement of Earnings to March 22, 2014.

    b)        (3 marks) Using Loblaw Companies' March 2014 balance sheet and the LTM income statement to March 2014, from part a), calculate the following ratios:

­   % of Total debt to Total Debt + Equity

­   EBIT-to-Interest expense

­   Total Debt to EBITDA

     c)        (2 marks) Assume Loblaw's wishes to issue a new $600 million bond with a coupon rate of 6%.  If the company has a maintenance test in their current bank credit agreement that stated: EBIT to Interest expense of at least 2.0x times, calculated on a rolling four quarter basis, would the company meet the test?  Briefly explain. 


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