Suppose interest rates increase from 4% to 5%. Between a 30-year bond paying an annual coupon...
Suppose interest rates increase from 4% to 5%. Between a 30-year bond paying an annual coupon of 4% or a 5-year bond paying an annual coupon of 4%, which of the two bonds will suffer the greater percentage decline in value? Why does this bond have greater interest rate risk? (Assume both bonds have equal credit risk.)
Homework Answers
A 30-years annual coupon bond will be more effected by change in interest rates, due to their longer maturity period.
Bonds with longer maturity have more interest rate risk.
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Suppose interest rates increase from 4% to 5%. Between a 30-year
bond paying an annual coupon...
Consider two bonds, a 3-year bond paying an annual coupon of 5%, and a 20-year bond,...
Consider two bonds, a 3-year bond paying an annual coupon of 5%, and a 20-year bond, also with an annual coupon of 5%. Both bonds currently sell at par value. Now suppose that interest rates rise and the yield to maturity of the two bonds increases to 9%. a. What is the new price of the 3-year bond? (Round your answer to 2 decimal places.) Price of the 3-year bond b. What is the new price of the 20-year bond?...
. Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond...
. Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT? a. If interest rates decline, the prices of both bonds will increase, but the 10-year bond would have a larger percentage increase in price. b. If interest rates decline, the prices of both bonds...
4) Suppose there is a 3-year bond with a $1000 face value, 30% annual coupon payments...
4) Suppose there is a 3-year bond with a $1000 face value, 30% annual coupon payments and a 20% annual yield to maturity. a) Without any calculation, briefly explain whether this bond will be selling a premium or a discount b) Calculate the price of this bond. c Calculate the duration of this bond. d) Suppose the interest rates in the economy rise by 5 percentage points immediately after someone bought this bond. Show a calculation using duration for what...
4) Suppose there is a 3-year bond with a $1000 face value, 30% annual coupon payments...
4) Suppose there is a 3-year bond with a $1000 face value, 30% annual coupon payments and a 20% annual yield to maturity. a) Without any calculation, briefly explain whether this bond will be selling a premium or a discount. b) Calculate the price of this bond. c) Calculate the duration of this bond. d) Suppose the interest rates in the economy rise by 5 percentage points immediately after someone bought this bond. Show a calculation using duration for what...
A 30 year, 5% coupon bond issued by a corporation (paying semi annual coupons) has a...
A 30 year, 5% coupon bond issued by a corporation (paying semi annual coupons) has a face value of $1000, with a market interest rate of 12% Is the bond selling at more or less than face value? What is the price of the bond? A 30 year 5% coupon issued by the United States government has a market interest rate of only 6% instead of 12%. Why might the market rate of interest on these 2 bonds be so...
Consider two bonds, a 3-year bond paying an annual coupon of 6.30% and a 10-year bond...
Consider two bonds, a 3-year bond paying an annual coupon of 6.30% and a 10-year bond also with an annual coupon of 6.30%. 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.) Bond price b. What is the new price of the 10-year bonds? (Do not round intermediate calculations. Round your...
Consider two bonds, a 3-year bond paying an annual coupon of 8%, and a 20- year...
Consider two bonds, a 3-year bond paying an annual coupon of 8%, and a 20- year bond, also with an annual coupon of 8%. Both bonds currently sell at par value. Now suppose that interest rates rise and the yield to maturity of the two bonds increases to 11%. a. What is the new price of the 3-year bond? (Round your answer to 2 decimal places.) Price of the 3-year bond b. What is the new price of the 20-year...
4) Suppose there is a 3-year bond with a $1000 face value, 30% annual coupon payments...
4) Suppose there is a 3-year bond with a $1000 face value, 30% annual coupon payments and a 20% annual yield to maturity a) Without any calculation, briefly explain whether this bond will be selling a premium or a discount Calculate the price of this bond Calculate the duration of this bond Suppose the interest rates in the economy rise by 5 percentage points immediately after someone bought this bond. Show a calculation using duration for what should happen to...
4) Suppose there is a 3-year bond with a $1000 face value, 30% annual coupon payments...
4) Suppose there is a 3-year bond with a $1000 face value, 30% annual coupon payments and a 20% annual yield to maturity. a) Without any calculation, briefly explain whether this bond will be selling a premium or a discount. b) Calculate the price of this bond. c) Calculate the duration of this bond. d) Suppose the interest rates in the economy rise by 5 percentage points immediately after someone bought this bond. Show a calculation using duration for what...
Suppose there is a 3-year bond with a $1000 face value, 30% annual coupon payments and...
Suppose there is a 3-year bond with a $1000 face value, 30% annual coupon payments and a 20% annual yield to maturity. 4) a Without any calculation, briefly explain whether this bond will be selling a premium or a discount. b) Calculate the price of this bond. c) Calculate the duration of this bond. d) Suppose the interest rates in the economy rise by 5 percentage points immediately after someone bought this bond. Show a calculation using duration for what...
Consider two bonds, a 3-year bond paying an annual coupon of 5%, and a 20-year bond, also with an annual coupon of 5%. Both bonds currently sell at par value. Now suppose that interest rates rise and the yield to maturity of the two bonds increases to 9%. a. What is the new price of the 3-year bond? (Round your answer to 2 decimal places.) Price of the 3-year bond b. What is the new price of the 20-year bond?...
4) Suppose there is a 3-year bond with a $1000 face value, 30% annual coupon payments and a 20% annual yield to maturity. a) Without any calculation, briefly explain whether this bond will be selling a premium or a discount b) Calculate the price of this bond. c Calculate the duration of this bond. d) Suppose the interest rates in the economy rise by 5 percentage points immediately after someone bought this bond. Show a calculation using duration for what...
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Consider two bonds, a 3-year bond paying an annual coupon of 8%, and a 20- year bond, also with an annual coupon of 8%. Both bonds currently sell at par value. Now suppose that interest rates rise and the yield to maturity of the two bonds increases to 11%. a. What is the new price of the 3-year bond? (Round your answer to 2 decimal places.) Price of the 3-year bond b. What is the new price of the 20-year...
4) Suppose there is a 3-year bond with a $1000 face value, 30% annual coupon payments and a 20% annual yield to maturity a) Without any calculation, briefly explain whether this bond will be selling a premium or a discount Calculate the price of this bond Calculate the duration of this bond Suppose the interest rates in the economy rise by 5 percentage points immediately after someone bought this bond. Show a calculation using duration for what should happen to...
Suppose there is a 3-year bond with a $1000 face value, 30% annual coupon payments and a 20% annual yield to maturity. 4) a Without any calculation, briefly explain whether this bond will be selling a premium or a discount. b) Calculate the price of this bond. c) Calculate the duration of this bond. d) Suppose the interest rates in the economy rise by 5 percentage points immediately after someone bought this bond. Show a calculation using duration for what...
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