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Question 20. Consider a 2-year bond. The coupon rate of the bond is 10%, and the...
Question 20. Consider a 2-year bond. The coupon rate of the bond is 10%, and the bond pays coupons semiannually. The bond is selling at a yield to maturity of 8.0% annually, or 4.0% semi-annually.
a. What is the duration of the bond? (12 points)
b. If the semi-annually yield changes from 4.0% to 5.0%, what is the predicted change in the price of the bond using duration? (8 points)
Solutions
jeff jeffy answered 6 months agoRelated Solutions
Q21. Consider a 2-year bond. The coupon rate of the bond is 10%, and the bond...
Q21. Consider a 2-year bond. The coupon rate of the bond is 10%,
and the bond pays coupons semiannually. The bond is selling at a
yield to maturity of 8.0% annually, or 4.0% semi-annually.
(a) What is the duration of the bond measured in half-years and
in years? (10 points)
(b) If the semi-annually yield changes from 4.0% to 5.0%, what
is the predicted change in the price of the bond (a dollar amount)
using duration? (7 points)
(c) Suppose...
Consider a 20-year bond with an annual coupon of 10%. The coupon rate will remain fixed...
Consider a 20-year bond with an annual coupon of 10%.
The coupon rate will remain fixed until the bond matures. The bond
has a yield to maturity of 8%. Which of the following statements is
correct?
1) The bond should currently be selling at its par
value.
2) If market interest rates decline, the price of the
bond will also decline.
3) If market interest rates remain unchanged, the bond’s
price one year from now will be higher than it...
First, consider a 10 year bond with a coupon rate of 7% and annual coupon payments....
First, consider a 10 year bond with a coupon rate of 7% and
annual coupon payments. Draw a graph showing the relationship
between the price and the interest on this bond. The price should
be on the y- axis and the interest rate on the x-axis. To compute
the various prices, consider interest rates between 2% and 12% (use
0.5% increments). So your x-axis should go from 2%, then 2.5% ...
until 11.5% and then 12%.
Is the relationship linear...
Consider a 3 year bond with a face value is $1,000 and a 10% coupon rate...
Consider a 3 year bond with a face value is $1,000 and a 10%
coupon rate
a) If the current interest rate is 2%, what should be the price
of the bond?
b) If you could purchase the bond for $1,100, is the yield you
are getting higher or lower than 2%? How can you tell?
c) Assume you purchase the bond for $1,100 and hold if for one
year. You collect one coupon payment and then sell the bond...
Consider a 5-year bond with a current yield of 8% and a coupon rate of 10%...
Consider a 5-year bond with a current yield of 8% and a coupon
rate of 10% (compounded yearly). One year from now this bond will
have a quoted price which is most likely:
Higher
Lower
The same
Possibly higher or lower
2. Consider a bond selling at par ($1000) with a coupon rate of 6% and 10...
2. Consider a bond selling at par
($1000) with a coupon rate of 6% and 10 years to maturity.
(Assuming
semi-annual
coupon payments)
(a)
What is the price of this bond if the required yield is 8%?
(b)
What is the price of this bond if the required yield increases from
8% to 9%, and by what percentage
did the price of this bond change?
Twitchy – a kind of junk bond –
carries a 10%...
Consider a bond paying a coupon rate of 20% per year, compounded annually, when the market interest rate (YTM) is only 10% per year.
Consider a bond paying a coupon rate of 20% per year,
compounded annually, when the market interest rate (YTM) is only
10% per year. The market interest rate (return for an investment of
like risk) will remain at 10% for the next two years. The bond has
two years until maturity. What is the HOLDING PERIOD RETURN (or
rate of return) over the first year on this bond?a. 8.32% b. 27.58% c. 9.24% d. 20% e. 10%
Consider a bond paying a coupon rate of 10% per year, compounded annually. Assume that the...
Consider a bond paying a coupon rate of 10% per year, compounded
annually. Assume that the market interest rate (YTM or return on
investments of like risk) is 15% per year. In other words you want
a 15% return on the bond. The bond has three years
until maturity. The par value is $1,000. Assume that you buy the
bond today for $885.84.
20) What is the interest payment that you will
receive each year (yr 1, yr 2, and...
Consider a bond paying a coupon rate of 10% per year, compounded annually. Assume that the...
Consider a bond paying a coupon rate of 10% per year, compounded
annually. Assume that the market interest rate (YTM or return on
investments of like risk) is 15% per year. In other words you want
a 15% return on the bond. The bond has three years
until maturity. The par value is $1,000. Assume that you buy the
bond today for $885.84.
21) What is the cash flow (interest only) that you
want to receive each year (yr 1,...
Consider a bond paying a coupon rate of 20% per year, compounded annually, when the market...
Consider a bond paying a coupon rate of 20% per year, compounded
annually, when the market interest rate (YTM) is only 10% per year.
The market interest rate (return for an investment of like risk)
will remain at 10% for the next two years. The bond has
two years until maturity. What is the HOLDING PERIOD
RETURN (or rate of return) over the first year on this
bond?
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