You have two bonds to choose from with semi-annual coupon payments: Bond A Bond B Time...

You have two bonds to choose from with semi-annual coupon payments:

	Bond A	Bond B
Time to maturity (years)	5	6
Annual yield to maturity	4.00%	4.00%
Annual coupon payment	40.00	65.94
Current price	-1000	-1000
Face value	1000	826.02

So we start with two bonds of equal price ($1000) and annual yield to maturity (4.00%).

A) What is the Macaulay duration (in years) for Bond A?

B) What is the Macaulay duration (in years) for Bond B?

C) Which bond should you choose to immunize your bond holdings from interest rate fluctuations?

Bond A

Bond B

D) Assume annual yield to maturity drops from 4.00% to 3.00%. What is the total ending wealth of Bond B?

E) Assume annual yield to maturity drops from 4.00% to 3.00%. What is the total ending wealth of Bond A?

**Please show your work** Thanks

Solutions

Expert Solution

ANSWER IN THE IMAGE ((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

C. bond YOU should choose to immunize your bond holdings from interest rate is Bond A. Because it is a Conventional Bond.

D,E.

jeff jeffy answered 1 year ago

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