This may help. A fund manager buys a $10 million parcel of 5.75% July 2022 bonds

Question

This may help. A fund manager buys a $10 million parcel of 5.75% July 2022 bonds on 15 January 2015 at 6.00%. Calculate the price paid for the parcel of bonds 1-+9575 1-9) 100$985$07758 C1-(1 $98.507758 The price for the parcel of bonds is $98.507758 x ($10mil/100)$9,850,775.80 6. Demonstrate the relationship between price risk and time to maturity by calculating the change in the price of a 5% coupon Treasury bond if rates increase from 5% to 6% and the bond has: a. one year to maturity, and b. ten years to maturity. 7, A superannuation fund buys a $20 million parcel of the 3.25% 21 April 2029 Treasury bonds by accepting a dealers quote of 3.65-3.61 for settlement on 21 April 2017 a. Calculate the settlement price, per $100 of face value. b. What is the settlement price for the $20 million parcel of bonds?

Explanation / Answer

Ans 6) P = 5/2 * (1 - (1 + .05/2)^(-2))/(.05/2) + 100/(.05/2)^2

P= $100

If interest rate incrase to 6%

P = 5/2 *(1 - (1 + .06/2)^(-2))/(.06/2) + 100/(.06/2)^2

= $99.04

Price decreased due to increase in rates.

Ans b) 10 years to maturity

P =5/2 * (1 - (1 + .05/2)^(-20))/(.05/2) + 100/(.05/2)^20 = $100

if interest rate increases from 5% to 6% then

P = 5/2 *(1 - (1 + .06/2)^(-20))/(.06/2) + 100/(.06/2)^20

= $92.56

As maturity increase price risk increases . Rate is inversly proportional to the bond price.

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