You must invest $100,000, and the bonds listed below from A to E are the only investments available today (assume that it is possible to buy a fraction of a bond in order to invest the full $100,000). The same 6% market interest rate (APR, compounded semi-annually) applies to all of these bonds and they have the following additional characteristics: A. 6 years to maturity and 4% coupon rate (coupons paid annually) B. 3 years to maturity and 7% coupon rate (coupons paid semi-annually) C. 6 years to maturity and 0% coupon rate (discount or zero-coupon bond) D. 3 years to maturity and 4% coupon rate (coupons paid semi-annually) E. 6 years to maturity and 4% coupon rate (coupons paid semi-annually) a) Rank these bonds according to their interest rate sensitivities, from the most interest rate sensitive to the least interest rate sensitive. b) If you want to benefit from an unexpected decrease in market interest rates, which bond would you purchase?1 c) If you want to minimize interest rate risk, which bond would you purchase? d) What is the duration (in years) of the bond you chose in part c)?
(a) answer : Rank of these bonds following A, E, C, D, B
from the interest rate sensitivities following manner rank A>E>C>D>B
In the bond A is the most interest rate sensitive and greater maturity among all and coupons was paid annually
and bond B is lower interest rate sensitive and least maturity and provides semi annually coupon
(b) answer :
You must invest $100,000, and the bonds listed below from A to E are the only...
Note: If not otherwise stated, assume that: • Yield-to-maturity (YTM) is an APR, semi-annually compounded • Bonds have a face value of $1,000 • Coupon bonds make semi-annual coupon payments; however, coupon rates (rc) are annual rates, i.e., bonds make a semi-annual coupon payment of rc/2 You must invest $100,000, and the bonds listed below from A to E are the only investments available today (assume that it is possible to buy a fraction of a bond in order to...
You must invest $200000. Market interest rates are 6% APR semi-annually compounded. What is the duration of this bond? Please show formulas and do not use financial calculator or excel. B. 3 years to maturity and 7% coupon rate (coupons paid semi-annually)
You want to make a 5-year investment on bonds, and if you buy bonds with longer period of maturity, they will be sold at the prevailing market price at the end of the fifth year. All coupons will be reinvested. You forecast that the rates are going to change after you purchase the bonds. Now you have three bonds with same initial YTM to consider: A. 5-year maturity, 6% coupon paid annually, YTM=9% B. 10-year maturity, 8% coupon paid annually,...
7. Your grandfather left an inheritance for you of $80,000. However you can only drawdown on the investment as follows: Years 1 – 4 $10,000 each year and Year 5 $40,000 Interest on the fund is 7.5%. What is the present worth of this inheritance? 10. The face value for Karen’s Limited bonds is $100,000 and has a 2 percent annual coupon. The 2 percent annual coupon bonds matures in 2022, and it is now 2012. Interest on these bonds...
a. Springfield Nuclear Energy Inc. bonds are currently trading at $1,775.16. The bonds have a face value of $1,000, a coupon rate of 10.5% with coupons paid annually, and they mature in 25 years. What is the yield to maturity of the bonds? b. Consider an annual coupon bond with a face value of $100,12 years to maturity, and a price of $76. The coupon rate on the bond is 6%. If you can reinvest coupons at a rate of...
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a. Springfield Nuclear Energy Inc. bonds are currently trading at $1,775.16. The bonds have a face value of $1,000, a coupon rate of 10.5% with coupons paid annually, and they mature in 25 years. What is the yield to maturity of the bonds? b. Consider an annual coupon bond with a face value of $100,12 years to maturity, and a price of $76. The coupon rate on the bond is 6%. If you can reinvest coupons at a rate of...
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