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bbishop -YouTubelBlackboard bishopQuiet Quit Are You Bishop State CommEnglsClubRent Tetb mework Help Save & payments that sell at par a-1, what will be the bonds' new prices if market yields change immediately bys 010 percent? a-2. What will be the new prices if market yields change immediately by :2.00 percent? b-1. The duration of these bonds is 111983 years. What are the predicted bond prices in each of the four cases using th rule? b-2. What is the amount of error between the duration prediction and the actual market values? Complete this question by entering your answers in the tabs below. Required A1 Required A2 Required B1 Required 82 The duration of these bonds is 11.1983 years. What are the predicted bond prices in each of the four cases using the duration rule? (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g. 32.16)) Bonds New Price At+010% Al-0 10% At + 20% At-20% Prex 14 of 15 Next > arch

Explanation / Answer

Solution (a) At +0.10%: P = 1,000(.08) {[1-(1/(1 + .081)30)]} + 1,000/(1 + .081)30= $988.85

Using calculator: N = 30, I = 8.1, PMT = 80, FV = 1,000, => PV = $988.85

At –0.10%: P = 1,000(.08) {[1-(1/(1 + .079)30)]} + 1,000/(1 + .079)30= $1,011.36

Using calculator: N = 30, I = 7.9, PMT = 80, FV = 1,000, => PV = $1,011.36

At +2.0%: P = 1,000(.08) {[1-(1/(1 + .10)30)]} + 1,000/(1 + .10)30= $811.46

Using calculator: N = 30, I = 10, PMT = 80, FV = 1,000, => PV = $811.46

At –2.0%: P = 1,000(.08) {[1-(1/(1 + .06)30)]} + 1,000/(1 + .06)30= $1,275.30

Using calculator: N = 30, I = 10, PMT = 80, FV = 1,000, => PV = $1,275.30

Solution (b)

Based on duration (D), P = -D × [rb/(1+ rb)] × P

At +0.10%: P = -11.1983 × (0.001/1.08) × $1,000 = -$10.297 => P = $989.7025

At -0.10%: P = -12.1608 × (-0.001/1.08) × $1,000 = $12.22 => P = $1,012.223

At +2.0%: P = -12.1608 × (0.02/1.08) × $1,000 = -$224.238 => P = $775.7625

At -2.0%: P = -12.1608 × (-0.02/1.08) × $1,000 = $226.163 => P = $1,226.163

Hope it will help you if you have any query then please ask in comments  

Determined Estimated Error At +0.10% 998.85 989.702 9.148 At -0.10% 1011.36 1012.22 -0.86 At +0.20% 811.46 775.76 35.7 At -0.20% 1275.3 1226.162 49.138

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