A bond has 4 years to maturity and $1,000 per value. The coupon rate is 16% and

Question

A bond has 4 years to maturity and $1,000 per value. The coupon rate is 16% and interest is paid semiannually. If the current market price of the bond is $1, 193.90, and the yield to maturity will not change in the next 6 months, what will be the market price 6 after the next coupon payment is made? You purchased an annual interest coupon bond one year ago that had 6 years remaining to maturity at that time. The coupon interest rate was 10% and the par value was $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%, find your annual total rate of return on holding the bond for that year. Calculate the duration of the following bond (coupon interest is paid annually).

Explanation / Answer

11.

YTM = Interest / current market price *100

= 80 / 1193.90 *100

= 6.7 %

11. market price 6months from now after the next coupon payment is made =

= interest *PVF + par value *PVF

= 80* 4.133 + 1000*.743

= 1073.64

13. Duration = (1+Y)/y - [(1+y) + t(c-y) ] c [(1+y)t - 1] + y

= (1+0.05/0.05) - [(1+ 0.05) + 3 (0.07 - 0.05) / 0.07 [ (1.05)3 - 1 ] + 0.05

= 21 - 18.1867

= 2.81 years

Modified duration = D / (1+ y)

= 2.81 / (1 + 0.04)

= 2.7

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