Exhibit 19.4
Use the Information Below for the Following Problem(S)
The following information is given concerning a substitution swap. You currently hold a 25 year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap candidate you are considering a 25 year, Aa 8 percent coupon bond priced to yield 10.50 percent. Assume a reinvestment rate of 10 percent, semiannual compounding, and a one-year workout period.
$$\begin{array} { l c c }
& \text { Current Bond } & \text { Candidate Bond } \
\hline \text { Dollar Investment } & \$ 817.44 & ? \
\text { Caupan } & 80.00 & 80.00 \
\text { i an One Coupon } & 2.00 & 2.20 \
\text { Principal Value at Year End } & 819.23 & 782.33 \
\text { Total Accrued } & 901.23 & 864.53 \
\text { Total Gain } & 83.79 & ? \
\text { Gain per Invested Dollar } & ? & ? \
\text { Realized Compound Yield } & ? & ?
\end{array}$$
-Refer to Exhibit 19.4.The value of the swap is ____ basis points in one year.

Question

Exhibit 19.4
Use the Information Below for the Following Problem(S)
The following information is given concerning a substitution swap. You currently hold a 25 year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap candidate you are considering a 25 year, Aa 8 percent coupon bond priced to yield 10.50 percent. Assume a reinvestment rate of 10 percent, semiannual compounding, and a one-year workout period.
 $$\begin{array} { l c c } 
& \text { Current Bond } & \text { Candidate Bond } \
\hline \text { Dollar Investment } & \$ 817.44 & ? \
\text { Caupan } & 80.00 & 80.00 \
\text { i an One Coupon } & 2.00 & 2.20 \
\text { Principal Value at Year End } & 819.23 & 782.33 \
\text { Total Accrued } & 901.23 & 864.53 \
\text { Total Gain } & 83.79 & ? \
\text { Gain per Invested Dollar } & ? & ? \
\text { Realized Compound Yield } & ? & ?
\end{array}$$
-Refer to Exhibit 19.4.The value of the swap is ____ basis points in one year.

Quizplus · Accepted Answer

$$\begin{array} { l c c } 
& \text { Current Bond } & \text { Candidnte Gond } \
\hline \text { Dollar Investrment } & \$ 817.44 & \$ 780.34 \
\text { Coupon } & 80.00 & 80.00 \
\text { i on One Coupon } & 2.00 & 2.20 \
\text { Principal Value at Year End } & 819.23 & 782.36 \
\text { Total Accrued } & 901.23 & 864.53 \
\text { Total Gain } & 83.79 & 84.19 \
\text { Gain per Invested Dollar } & & \
& 0.102503 & 0.107889 \
\text { Realized Compound Yield } & 10.003 \% & 10.5126
\end{array}$$ 
Current prices:
 $P_{\text {curent }}$$$\begin{array} { l } 
= 40 \left( p V I F A _ { 5 } + 50 + 1000 ( p V I F \right. \
= 40 ( 18.2559 ) + 1000 ( 0.0872 ) = \$ 817.44
\end{array}$$ Swap value = 10.5126 - 10.0001 = 0.5125 = 51.25 basis points

Exhibit 19 -Refer to Exhibit 19