1. Both bond A and bond B have 9.4 percent coupons and are priced at par value.
ID: 2709785 • Letter: 1
Question
1. Both bond A and bond B have 9.4 percent coupons and are priced at par value. Bond A has 7 years to maturity, while bond B has 20 years to maturity.
a)
Assume if interest rates suddenly rise by 2 percent, what is the percentage change in price of bond A and bond B? (Round your answer to 2 decimal places. Negative answers should be indicated by a minus sign. Omit the "%" sign in your response.)
Bond A
%
Bond B
%
b)
Assume if interest rates suddenly fall by 2 percent instead, what would the percentage change in price of bond A and bond B? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)
Bond A
%
Bond B
%
2. Suppose you buy a 7.2 percent coupon bond today for $1,140. The bond has 10 years to maturity.
a.
What rate of return do you expect to earn on your investment? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)
Rate of return
%
b-1.
Two years from now, the YTM on your bond has increased by 2 percent, and you decide to sell. What price will your bond sell for? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Price
$
b-2.
What is the annual realized yield on your investment? (Negative amounts should be indicated by a minus sign. Round your answer to 2 decimal places. Omit the "%" sign in your response.)
Realized return
%
3. What is the Macaulay duration of a 10.4 percent coupon bond with five years to maturity and a current price of $974.60? What is the modified duration? (Round your answer to 3 decimal places.)
Duration
Macaulay
Years
Modified
Years
4. Consider a 9.00 percent coupon bond with six years to maturity and a current price of $958.50. Suppose the yield on the bond suddenly increases by 2 percent.
1.
Use duration to estimate the new price of the bond. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Price
$
2.
Calculate the new bond price. (Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Price
$
5. A Treasury bond with 8 years to maturity is currently quoted at 108:7. The bond has a coupon rate of 8.3 percent. What is the yield value of a 32nd for this bond? (Round your answer to 3 decimal places.)
Yield value (in basis point)
1. Both bond A and bond B have 9.4 percent coupons and are priced at par value. Bond A has 7 years to maturity, while bond B has 20 years to maturity.
Explanation / Answer
1.a
Bond A:
Price at par = 1000
FV = 1000
PMT = 94
N = 7
I = 11.4
PV = 907
Percent change = -9.3%
Bond B:
Price at par = 1000
FV = 1000
PMT = 9.4
N = 20
I = 11.4
PV = 844.8
Percent change = -15.52%
1.b
Bond A:
Price at par = 1000
FV = 1000
PMT = 94
N = 7
I = 7.4
PV = 1106.30
Percent change = 10.63%
Bond B:
Price at par = 1000
FV = 1000
PMT = 9.4
N = 20
I = 7.4
PV = 1205.45
Percent change = 20.54%
2.a
PMT = 72
PV = 1140
N = 10
PV = 1140
I = 5.36
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