1. Both bond A and bond B have 9.4 percent coupons and are priced at par value.
ID: 2710943 • 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) YTM = coupon rate since bond are price at par value
K = N
BOND PRICE A= [(Coupon)/(1 + YTM)^k] + Par value/(1 + YTM)^N
k=1
K = 7
BOND PRICE A= [(9.4*1000/100)/(1 + 11.4/100)^k] + 1000/(1 + 11.4/100)^7
k=1
= 906.96
%age change in price = (906.96 - 1000)*100/1000 = -9.30%
K = 20
BOND PRICE B= [(9.4*1000/100)/(1 + 11.4/100)^k] + 1000/(1 + 11.4/100)^20
k=1
= 844.81
%age change in price = (844.81 - 1000)*100/1000 = -15.52%
2) YTM = coupon rate since bond are price at par value
K = N
BOND PRICE A= [(Coupon)/(1 + YTM)^k] + Par value/(1 + YTM)^N
k=1
K = 7
BOND PRICE A= [(9.4*1000/100)/(1 + 7.4/100)^k] + 1000/(1 + 7.4/100)^7
k=1
= 1106.29
%age change in price = (1106.29 - 1000)*100/1000 = 10.63%
K = 20
BOND PRICE B= [(9.4*1000/100)/(1 + 7.4/100)^k] + 1000/(1 + 7.4/100)^20
k=1
= 1205.45
%age change in price = (1205.45 - 1000)*100/1000 = 20.55%
3)
K = N
BOND PRICE A= [(Coupon)/(1 + YTM)^k] + Par value/(1 + YTM)^N
k=1
K = 10
1140= [(7.2*1000/100)/(1 + YTM/100)^k] + 1000/(1 + YTM/100)^10
k=1
YTM = 5.35%
Please ask remaining parts separately
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.