1) Consider two bonds with identical face value of $100 that pay semiannual coup
ID: 2653524 • Letter: 1
Question
1) Consider two bonds with identical face value of $100 that pay semiannual coupons. You have the following information:
Bond
Coupon Rate
Maturity
YTM
A
6.0%
5 years
5.5%
B
7.0%
15 years
6.0%
Compute the price of bonds A and B.
Suppose that you have $100,000 that you want to invest in bonds. Six months later, bond A trades for $103, and bond B trades for $109. Compute your annualized HPR if:
You invest everything in A
You invest everything in B
You allocate 60% to bond A and 40% to bond B
(You can assume that you can buy fractions of each bond if necessary).
Bond
Coupon Rate
Maturity
YTM
A
6.0%
5 years
5.5%
B
7.0%
15 years
6.0%
Explanation / Answer
Answer :
Calculation of price of bonds:
Bond A=6*4.27028+100*0.765134
=126.386814
Bond B= 7*9.7122489+100*0.417265055
=109.7122
Annualized HPR =
{[(Income + (End of Period Value – Initial Value)] / Initial Value+ 1}1/t – 1
Investing in A= {6+(103-100)/100+1}1/6-1
=-33.167%
Investing in B= {7+(109-100)/100+1}1/6-1
=-26.441%
Proportion=-33.167%*0.6+(-26.441*0.4)
=-30.4764%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.