Question

QUESTION THREE a) A colleague of yours has a K100,000-00, 2 years treasury Bond matunng in ons, issued at a fixed coupon of 10%, payable annually. He informs you that he has an urgent need of money and wants to sell you the Bond. What's the maximum price you would offer assuming the yield on a 12 months treasury bill is currently at 12%? [4 Marks] Briefly discuss how you may be affected by inflation over the holding period to maturity [6 Marks] b) A 273 Days Treasury bill of 1,000 Face Value is currently on offer at K840.33. i Calculate its Yield to maturity (YTM) at this price [2 marks] ii. Calculate its Effective Annual Return (APR). [3 Marks] iii. Briefly explain why Treasury bills are treated as risk-free securities [5 Marks) (TOTAL: 20 Marks) Page 3 of 5

Answer 1

Since, jetio is negative, it does not comes useful meaning.

Question tour Since all states have same (also, Expected probability, Return I for the security - will be a 198.25 + 16.58.25)+ (2.58.25) + (-4.58.25) - 3.315%. (6) Standard Deeviation can be calculated using following table- Lstate. All (2) (3) (4) (5) (6) eum & Referten (1-2) (1-2) 2 Probability (485) stong 7 3.375 5.625 31.6406 .25 7.91015 Normal 6.5 3.375 3.125 9.7656 .25 2.4414 kreak 25 3+375 -.875 07656 125 1914 Recession -4.5 3.375 7875 62.0156 .25 15.5039 Eftotal) 26.04685 Sum of final column in the above table to derive yarance of sec reteren. | So, Standard deviation is = √26.04685 = 5.1036 te = .051036 O In order to evaluate security performance, sharpe's measure will be used. of this ratio autcome is positive, secunity is performing well, in reverse condition, secweiter is not performing well. so sharpe ratio = Expected return - Benchmark Rate standard deviation of security PRO - 3345-3.52-24 REDMI NOTE 5 PRO MI DUAL CAMERA • 051036
since ration is negative it doesnot convey any useful meaning upto when performance of any other security is measured and compared with this security .