Question

MLK Bank has an asset portfolio that consists of $160 million of 15-year, 8.5 percent coupon, $1,000 bonds with annual coupon payments that sell at par. a-1. What will be the bonds' new prices if market yields change immediately by 0.10 percent? a-2. What will be the new prices if market yields change immediately byt2.00 percent? b-1. The duration of these bonds is 9.0101 years. What are the predicted bond prices in each of the four cases using the duration rule? b-2. What is the amount of error between the duration prediction and the actual market values? Complete this question by entering your answers in the tabs below Required A1 Required A2 Required B1Required B2 What is the amount of error between the duration prediction and the actual market values? (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16)) Amount of Error At + 0.10% At-0.10% At + 2.0% At-2.0% (0.05) (0.05) (18.21) (21.97) Required B1 Required B2

Answer 1

The actual bond prices have been calculated using the PV function in EXCEL

the predicted bond prices have been calculated as follows:

as per duration rule:

% change in bond's price due to change in yield , p= -m*y

where m = modified duration y = change in yield to maturity of bond

predicted bond price = (1+p)*initial bond price

initial bond price = face value since bond sells at par initially

amount of error = actual bond price - predicted bond price