A) it is given that for 10 year zero coupon bond by government is trading at $613.91
Say yiled Of this bond is r
r = 5%
For bond 2, it is given that there is a default premium of 2%. Therefore yiled. Should be 5%+2% =7%
Therefore price of bond 2 =
Bond 3 is a 5 year annual coupon. Paying bond with coupon rate = 15%. It is given that it is having default premium of 9% and a similar government bond is having ytm. Of 6 %. Therefore ytm of bond 3 = 6%+9% =15%.ytm is equal to coupon rate. therefore bond will be btrading at par value 1000.
Bond 4 is government bond with ytm = 6% and annual coupon rate =15%
Therefore price =
B. Macaulays duration of zero coupon bonds will be equal to the tenure of the bond
Therefore Macaulays duration for bond 1 and 2 = 10 years
For bond 3 and 4, Macaulays duration is calculated As follows.
The number given in bold is Macaulays duration.
C) MACAULAYS duration of the portofio is the weighted average of the durations of the bonds
Here we have 0.4*10 + (0.2*10) +(0.2*3.855)+(0.2*4.03) =7.577
D) if yield curve is going to shift upwards, prices are going to fall. To minimize the effect on our portfolio we should increase the weight of bonds with low duration And decrease the weight of bonds with high duration. Price changes are proportional to duration.
Your portfolio contains 40% of Bond I, 20% of Bond II, 20% of Bond Ill and...
How many of the bonds described below are trading at a premium? Bond I: 10 year annual, $100 par value, YTM = 8%, Coupon Rate = 5% Bond II: 100 year annual, $75 par value, YTM = 2%, zero coupon Bond III: 1 year annual, $1000 par value, YTM = 7%, Coupon Rate = 6% Bond IV: 6 year annual, $150 par value, YTM = 4%, Coupon Rate = 4%
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