Question

Fixed Income HW due 6/29/19

Assume today is June 19, 2019 and that all bonds pay interest annually with a face value of $1,000. YTM = Current yield + Capital Gains yield; CY = Annual Interest/Current Price

GE is A rated; AA Treasuries yield 3-year is 1.90%, 10-year 2.10%

5 Years ago GE issued 6% coupon paying bonds with a face value set to mature on June 19, 2029. Growth concerns have forced monetary authorities throughout the world to lower interest rates during the past several years and as such, the price of these GE bonds has risen to 1175.00

1. Calculate your annualized return if you assume that you buy the bonds today and they are not called, and you reinvest the interest in years 1-5 at 3% and in year 6-10 at 5%.

Explain why your answer differs from the YTM that you calculated in question 1.

2. Calculate the Macaulay Duration and Modified Duration for these bonds based on today’s price. Given your calculations estimate what would happen to the price of the bonds if interest rates were to rise 1% from current (today’s levels). Assume the change is immediate and dissect the change in price due to duration and compare it to the actual calculated change in price.

Answer 1