Question

In: Finance

a. A newly issued bond has a maturity of 10 years and pays a 7% coupon...

a. A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon payments coming once annually). The bond sells at par value. What is the duration of the bond?

b. Find the actual price of the bond assuming that its yield to maturity immediately increases from 7% to 8% (with maturity still 10 years)

Solutions

Expert Solution

Part A:

Duartion = Sum [Weight * Year ]

Year CF PVF @7% Disc CF Weight Wt * Year
1 $      70.00     0.9346 $   65.42     0.0654          0.07
2 $      70.00     0.8734 $   61.14     0.0611          0.12
3 $      70.00     0.8163 $   57.14     0.0571          0.17
4 $      70.00     0.7629 $   53.40     0.0534          0.21
5 $      70.00     0.7130 $   49.91     0.0499          0.25
6 $      70.00     0.6663 $   46.64     0.0466          0.28
7 $      70.00     0.6227 $   43.59     0.0436          0.31
8 $      70.00     0.5820 $   40.74     0.0407          0.33
9 $      70.00     0.5439 $   38.08     0.0381          0.34
10 $ 1,070.00     0.5083 $ 543.93     0.5439          5.44
Duration          7.52

Part B:

Price of Bond = PV of Cfs from it.

Year CF PVF @8% Disc CF
1 $      70.00     0.9259 $      64.81
2 $      70.00     0.8573 $      60.01
3 $      70.00     0.7938 $      55.57
4 $      70.00     0.7350 $      51.45
5 $      70.00     0.6806 $      47.64
6 $      70.00     0.6302 $      44.11
7 $      70.00     0.5835 $      40.84
8 $      70.00     0.5403 $      37.82
9 $      70.00     0.5002 $      35.02
10 $ 1,070.00     0.4632 $    495.62
price of Bond $    932.90

Related Solutions

A newly issued bond has a maturity of 10 years and pays a 7% coupon rate...
A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon paymentscoming once annually). The bond sells at par value. Assume par value is equal to $ 100. a) What are the convexity and the duration of the bond? b) Find the actual price of the bond assuming that its yield to maturity immediately increases from 7% to 8% (with maturity still 10 years). c) What price would be predicted by the duration...
A newly issued bond has a maturity of 10 years and pays a 7% coupon rate...
A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon payments coming once annually). The bond sells at par value of $100. (a) What are the duration, modified duration and dollar duration of the bond? What is its convexity? (b) Find the actual price of the bond assuming that its yield to maturity immediately increases from 7% to 8%? (c) What price would be predicted by using duration? What is the prediction...
A newly issued bond has a maturity of 10 years and pays a 7% coupon rate...
A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon payments coming once annually). The bond sells at par value. a. What are the convexity and the duration of the bond? Use the formula for convexity in footnote 7. (Round your answers to 3 decimal places.) Convexity Duration b. Find the actual price of the bond assuming that its yield to maturity immediately increases from 7% to 8% (with maturity still 10...
A newly issued bond has a maturity of 10 years and pays a 8.0% coupon rate...
A newly issued bond has a maturity of 10 years and pays a 8.0% coupon rate (with coupon payments coming once annually). The bond sells at par value. A.) What are the convexity and the duration of the bond? Use the formula for convexity in footnote 7. (Round your answers to 3 decimal places.) Convexity ______ Duration _________ years B.) Find the actual price of the bond assuming that its yield to maturity immediately increases from 8.0% to 9.0% (with...
A newly issued bond has a maturity of 10 years and pays a 5.5% coupon rate...
A newly issued bond has a maturity of 10 years and pays a 5.5% coupon rate (with coupon payments coming once annually). The bond sells at par value. a. What are the convexity and the duration of the bond? Use the formula for convexity in footnote 7. b. Find the actual price of the bond assuming that its yield to maturity immediately increases from 5.5% to 6.5% (with maturity still 10 years). Assume a par value of 100. c. What...
A newly issued bond has a maturity of 10 years and pays a 5.5% coupon rate...
A newly issued bond has a maturity of 10 years and pays a 5.5% coupon rate (with coupon payments coming once annually). The bond sells at par value. a. What are the convexity and the duration of the bond? b. Find the actual price of the bond assuming that its yield to maturity immediately increases from 5.5% to 6.5% (with maturity still 10 years). Assume a par value of 100. c. What price would be predicted by the modified duration...
A newly issued bond has a maturity of 10 years and pays a 5.5% coupon rate...
A newly issued bond has a maturity of 10 years and pays a 5.5% coupon rate (with coupon payments coming once annually). The bond sells at par value. a. What are the convexity and the duration of the bond? b. Find the actual price of the bond assuming that its yield to maturity immediately increases from 5.5% to 6.5% (with maturity still 10 years). Assume a par value of 100. c. What price would be predicted by the modified duration...
A newly issued bond pays its coupons once a year. Its coupon rate is 4.6%, its maturity is 10 years, and its yield to maturity is 7.6%.
  A newly issued bond pays its coupons once a year. Its coupon rate is 4.6%, its maturity is 10 years, and its yield to maturity is 7.6%. a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 6.6% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Holding-period return 14.9 % b. If you sell the bond after one...
A corporate bond pays 10% (annual) coupon and has 2 years left to maturity.
A corporate bond pays 10% (annual) coupon and has 2 years left to maturity. Its price in the market is USD 100.75. A fixed-income portfolio manager holds this bond in her portfolio and is required to report the benchmark spread of this bond in her quarterly filings to the SEC. Below is a table showing the available treasury security information she is looking at (from the same website where you got your Chapter 5 homework data, but these are for...
A newly issued 10-year maturity, 6% coupon bond making annual coupon payments is sold to the...
A newly issued 10-year maturity, 6% coupon bond making annual coupon payments is sold to the public at a price of $920. What will be an investor’s taxable income from the bond over the coming year? The bond will not be sold at the end of the year. The bond is treated as an original issue discount bond. (Round your answer to 2 decimal places.) Taxable Income:
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT