A. Bond Features Maturity (years) = 7 Face Value = $1,000 Starting Interest Rate 4.28% Coupon...

A.

Bond Features
Maturity (years) =	7
Face Value =	$1,000
Starting Interest Rate	4.28%
Coupon Rate =	4%
Coupon dates (Annual)

If interest rates change from 4.28% to 6.45% immediately after you buy the bond today (and stay at the new interest rate), what is the price effect in year 2 ?

State your answer to the nearest penny (e.g., 48.45)

If there is a loss, state your answer with a negative sign (e.g., -52.30)

B.

Assume you buy a bond with the following features

Bond maturity = 4
Coupon Rate = 5%
Face Value = $1,000
Annual Coupons

When you buy the bond the market interest rate = 4.24%
Immediately after you buy the bond the interest rate changes to 7.15%
What is the "reinvestment" effect in year 3 ?

Expert Solution

Q#A:

Total term is 7 years. In year 2, remaining term to maturity is 5 years

Price effect in year 4= -85.32 (loss)

Calculations as below:

Q#B:

Reinvestment effect= $4.53

Calculations as below:

jeff jeffy answered 1 year ago

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