Consider the following bonds:<span data-dojo-type="xl.player.controls.Tab" data-dojo-props="styleName:""" class="xlTab" id="xl_player_controls_Tab_0" widgetid="xl_player_controls_Tab_0" style="box-sizing: border-box; display: inline-block; overflow: hidden; margin: 0px 2px; vertical-align: bottom; width: 44px; height: 16px;"> <table role="presentation" class="rvTable"><colgroup style="box-sizing: border-box;"><col style="box-sizing: border-box; width: 83px;"/><col style="box-sizing: border-box; width: 241px;"/><col style="box-sizing: border-box; width: 186px;"/></colgroup><tbody style="box-sizing: border-box;"><tr style="box-sizing: border-box;" class="firstRow"><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">Bond</td><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">Coupon Rate (annual payments)</td><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">Maturity (years)</td></tr><tr style="box-sizing: border-box;"><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">A</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">0%</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"><span class="eqLabel fNormal" id="var_0" widgetid="var_0" aria-label="13" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">13</td></tr><tr style="box-sizing: border-box;"><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">B</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">0%</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"><span class="eqLabel fNormal" id="var_1" widgetid="var_1" aria-label="8" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">8</td></tr><tr style="box-sizing: border-box;"><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">C</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"><span class="eqLabel fNormal" id="var_2" widgetid="var_2" aria-label="4" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">4%</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"><span class="eqLabel fNormal" id="var_3" widgetid="var_3" aria-label="13" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">13</td></tr><tr style="box-sizing: border-box;"><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">D</td><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"><span class="eqLabel fNormal" id="var_4" widgetid="var_4" aria-label="12" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">12%</td><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"><span class="eqLabel fNormal" id="var_5" widgetid="var_5" aria-label="8" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">8</td></tr></tbody></table>a. What is the percentage change in the price of each bond if its yield to maturity falls from <span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">7% to <span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">6%?b. Which of the bonds A<span class="eqLabel fNormal" id="xl_eqeditor_EqLabel_80" widgetid="xl_eqeditor_EqLabel_80" aria-label="minus" style="box-sizing: border-box; display: inline-block; font-family: Arial; line-height: 0 !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">−D is most sensitive to a 1% drop in interest rates from <span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">7% to <span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">6% and why? Which bond is least sensitive? Provide an intuitive explanation for your answer.Note: Assume annual compounding.

<img src="//img.wizedu.com/questions/3b79cb00-cd14-11ec-affa-2d3219e5003c.jpg" title="1626521211628009.jpg" width="2003" height="3383" /> <img src="//img.wizedu.com/questions/3dfef440-cd14-11ec-a637-9926141cb25c.jpg" title="1626521251102472.jpg" /> Which of the bonds A through D is most sensitive to a 1% drop in interest rates, from <span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">7% to <span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">6%, and why?Answer: Bond A, because it has the lowest coupon and longest maturity. Which of the bonds A through D is least sensitive to a 1% drop in interest rates, from <span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">7% to <span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">6%, and why?answer: Bond D, because it has the highest coupon and shortest maturity

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In: Other

Consider the following bonds: Bond Coupon Rate (annual payments) Maturity (years) A 0% 13 B 0% 8 C 4% 13 D 12% 8 a. What is the percentage change in the price of each bond if its yield to ma

Consider the following bonds:

Bond

Coupon Rate (annual payments)

Maturity (years)

A

0%

B

0%

C

%

D

%

a. What is the percentage change in the price of each bond if its yield to maturity falls from % to %?

b. Which of the bonds AD is most sensitive to a 1% drop in interest rates from % to % and why? Which bond is least sensitive? Provide an intuitive explanation for your answer.

Note: Assume annual compounding.

Expert Solution

Which of the bonds A through D is most sensitive to a 1% drop in interest rates, from % to %, and why?

Answer: Bond A, because it has the lowest coupon and longest maturity.

Which of the bonds A through D is least sensitive to a 1% drop in interest rates, from % to %, and why?

answer: Bond D, because it has the highest coupon and shortest maturity

Amanda K answered 2 years ago

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Question

Consider the following bonds: Bond Coupon Rate (annual payments) Maturity (years) A 0% 13 B 0% 8 C 4% 13 D 12% 8 a. What is the percentage change in the price of each bond if its yield to ma

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