Question

4 part question please answer all

The next four problems refer to the bonds of Ted and Alice. Ted and Alice have bonds with Ba Coupons which make semiannual payinents. Both bonds are priced at par value. Ted's bond has a 4-year maturity and Alice's bond has 20 years remaining until maturity. 15. If rates suddenly rise by 1 percentage point (that is, 100 basis points), estimate the price change for Ted's bond. A) A loss greater than 5% B) A loss less than 5% C) No change D) Again less than 5% E) A gain greater than 5% 16. If rates suddenly rise by 1 percentage point that is, 100 basis points), estimate the price change for Alice's bond. A) A loss greater than 5% B) A loss less than 5% C) No change D) Again less than 5% E) A gain greater than 5% 17. If instead, rates suddenly fell by 1 percentage point that is, 100 basis points), estimate the price change for Ted's bond. A) A loss greater than 5% B) A loss less than 5% C) No change D) Again less than 5% E) A gain greater than 5% 18. If instead, rates suddenly fell by 1 percentage point that is, 100 basis points), estimate the price change for Alice's bond. A) A loss greater than 5% B) A loss less than 5% C) No change D A gain less than 5% A gain greater than 5%

Answer 1

15:B

(Loss is 3.3%)

16: A

(Loss is 9.2%)

17: D

(Gain is 3.44%)

18: E

(Gain is 10.68%)

Workings

		Ted	Alice
	Coupon rate	8%	8%
	Term in years	4	20
	Face value	1000	1000
	Original price	1000	1000
	Hence original YTM	8%	8%
15	New YTM	9.00%
	Price after increase	$967.02
	% Change	-3.30%
16	New YTM		9.00%
	Price after increase		$907.99
	% Change		-9.20%

		Ted	Alice
17	New YTM	7.00%
	Price after increase	$1,034.37
	% Change	3.44%
18	New YTM		7.00%
	Price after increase		$1,106.78
	% Change		10.68%

AutoSave © of CHO- Book1 - Excel Sign in File Home Insert Draw Page Layout Formulas Data Review View Help O Tell me what you want to do Share - Calibri = = det -9 - A À = - A - E ab - Insert - S&Delete - Format 7 A ~ Z Sort & Find & Filter - Select General $ - % Numberto Paste BI U - Conditional Format as Formatting Table Cell Styles Clipboard Font Alignment Styles Cells Editing C18 - : X for 1000 В. E F G H Alice Ted 0.08 Coupon rate Term in years Face value Original price Hence original YTM Alice 0.08 20 1000 1000 0.08 17 New YTM Price after increase % Change Ted =8%-1% =-PV(7%/2,4*2,8%*1000/2,1000) =(H17-C19)/C19 1000 1000 0.08 ΤΑ 15 16 17 18 19 20 21 22 15 23 24 25 26 16 27 18 New YTM Price after increase % Change =8%-1% =-PV(7%/2,20*2,8%*1000/2,1000) =(121-D19/019 New YTM Price after increase % Change =8%+1% =-PV(9%/2,4*2,8%*1000/2,1000) =(C23-C19)/C19 New YTM Price after increase % Change =8%+1% =-PV(9%/2,20*2,8%*1000/2,1000) =(D27-D19)/D19 28 29 30 31 32 33 34