3) Janice Kerrman is considering two 10-year AAA corporate bonds: Sentinel bond is a noncallable 4%...

3) Janice Kerrman is considering two 10-year AAA corporate bonds:

Sentinel bond is a noncallable 4% coupon bond priced at $100

Colina bond is a 4.5% coupon bond priced at $100 callable at a price of $102. Both bonds pay coupons semiannually.

a) Suppose market rates decline by 1%. Contrast the effect of this decline on the price of each bond. (15 Pts)

b) Which bond should Kerrman prefer if rates are expected to rise or fall? (10 Pts)

Expert Solution

Calculation is shown below:

Following shows working

jeff jeffy answered 2 years ago

On Jan 1, 2012, FIN307 is considering the newly issued 10-year AAA corporate bond, which is...

On Jan 1, 2012, FIN307 is considering the newly issued 10-year AAA corporate bond, which is due Jan 1, 2022, with a coupon rate of 6% per year paid every 6 months. The bond is traded at par. Suppose the market interest rate declines by 100 bps (i.e., 1%), what is the duration and modified duration (before interest rate change) and the effect of the market interest decline on the bond price?

Consider two bonds, a 3-year bond paying an annual coupon of 6.50% and a 10-year bond...

Consider two bonds, a 3-year bond paying an annual coupon of 6.50% and a 10-year bond also with an annual coupon of 6.50%. Both currently sell at a face value of $1,000. Now suppose interest rates rise to 9%. a. What is the new price of the 3-year bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is the new price of the 10-year bonds? (Do not round intermediate calculations. Round your answer to...

Consider two bonds, a 3-year bond paying an annual coupon of 7.00% and a 10-year bond...

Consider two bonds, a 3-year bond paying an annual coupon of 7.00% and a 10-year bond also with an annual coupon of 7.00%. Both currently sell at a face value of $1,000. Now suppose interest rates rise to 12%. a. What is the new price of the 3-year bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is the new price of the 10-year bonds? (Do not round intermediate calculations. Round your answer to...

Consider two bonds, a 3-year bond paying an annual coupon of 5.40% and a 10-year bond...

Consider two bonds, a 3-year bond paying an annual coupon of 5.40% and a 10-year bond also with an annual coupon of 5.40%. Both currently sell at face value of $1,000. Now suppose interest rates rise to 10%. a. What is the new price of the 3-year bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Bond price $ b. What is the new price of the 10-year bonds? (Do not round intermediate calculations. Round...

Consider two bonds, a 3-year bond paying an annual coupon of 6.90% and a 10-year bond...

Consider two bonds, a 3-year bond paying an annual coupon of 6.90% and a 10-year bond also with an annual coupon of 6.90%. Both currently sell at a face value of $1,000. Now suppose interest rates rise to 12%. a. What is the new price of the 3-year bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is the new price of the 10-year bonds? (Do not round intermediate calculations. Round your answer to...

Consider two bonds, a 3-year bond paying an annual coupon of 6.60% and a 10-year bond...

Consider two bonds, a 3-year bond paying an annual coupon of 6.60% and a 10-year bond also with an annual coupon of 6.60%. Both currently sell at a face value of $1,000. Now suppose interest rates rise to 10%. a. What is the new price of the 3-year bonds? b. What is the new price of the 10-year bonds?

You are considering a corporate bond with 10% coupon bonds with semiannual payments and a yield...

You are considering a corporate bond with 10% coupon bonds with semiannual payments and a yield to maturity of 11% . The bonds mature in 9 years. What is the market price per bond if the face value is $1,000? (Round answers to two decimals, enter answer without $ or "," , such as 1234.78)

4. a) Compute the modified duration of a 10% coupon, 4-year corporate bond with a yield...

4. a) Compute the modified duration of a 10% coupon, 4-year corporate bond with a yield to maturity of 8%. b) Using the modified duration, If the market yield drops by 25 basis points, there will be a __________% (increase/decrease) in the bond's price.

There are two bonds on sale the investors can choose from: Bond A: 4-year, 10% coupon...

There are two bonds on sale the investors can choose from: Bond A: 4-year, 10% coupon rate, $1,000 face value. Bond B: 30-year, 8% coupon rate, $1,000 face value. Investors may have access to different information or interpret the information differently which would cause them to arrive at different conclusions regarding the evaluation of assets. Assume that investor I sees both bonds as risky investments and asks a promised yield of 12% from each. Investor II does not see them...

Consider the following two bonds. Bond A: 10-year maturity, 4% coupon rate, $1,000 par value Bond...

Consider the following two bonds. Bond A: 10-year maturity, 4% coupon rate, $1,000 par value Bond B: 5-year maturity, 4% coupon rate, $1,000 par value Assuming that the YTM changes from 6% to 7%, calculate % change in each bond’s price.

Question