8. Which bond is more sensitive to an interest rate change of 0.75 percent? Bond A: YTM - 4.00%, maturity - 8 years, coupon = 6% or $60, par value = $1,000. Bond B: YTM = 3.50%, maturity = 5 years, coupon = 7% or $70, par value = $1,000. %3D (a) Bond A (b) Bond B (c) Both are equally sensitive. (d) Cannot be determined

8. Which bond is more sensitive to an interest rate change of 0.75 percent? Bond A: YTM - 4.00%, maturity - 8 years, coupon = 6% or $60, par value = $1,000. Bond B: YTM = 3.50%, maturity = 5 years, coupon = 7% or $70, par value = $1,000. %3D (a) Bond A (b) Bond B (c) Both are equally sensitive. (d) Cannot be determined

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Which bond is more sensitive to an interest rate change of 1 percent? Bond A: Yield to maturity = 4.00%, maturity = 8 years, coupon = 6% or £60, face value = £1,000. OR Bond B: Yield to maturity = 3.50%, maturity = 5 years, coupon = 7% or £70, face value = £1,000. A. Bond A B. Bond B C. Cannot be determined D. Both are equally sensitive.
The following information about bonds A, B, C, and D are given. Assume that bond prices admit noarbitrage opportunities. What is the convexity of Bond D?Cash Flow at the end ofBond Price Year 1 Year 2 Year 3A 91 100 0 0B 86 0 100 0C 78 0 0 100D ? 5 5 105
Calculating the risk premium on bonds The text presents a formula where (1+1) = (1-p)(1 +i+x) + p(0) where i is the nominal interest rate on a riskless bond x is the risk premium p is the probability of default (bankruptcy) If the probability of bankruptcy is zero, the rate of interest on the risky bond is When the nominal interest rate for a risky borrower is 8% and the nominal policy rate of interest is 3%, the probability of bankruptcy is %. (Round your response to two decimal places.) When the probability of bankruptcy is 6% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) When the probability of bankruptcy is 11% and the nominal policy rate of interest is 4%, the nominal interest rate for a risky borrower is %. (Round your response to two decimal places.) The formula assumes that payment upon default is zero. In fact, it is often positive. How would you change the formula in this case?…
Required:(a) If both bonds had a required rate of return of 10%, what would the bonds’ prices be?(b) Explain what it means when a bond is selling at a discount, a premium, or at its face amount (par value). Based on results in part (a), would you consider both bonds to be selling at a discount, premium, or at par?
Consider the following two Treasury securities: Bond Price Modified duration (years) A $100 6 B $80 7 For a 25 basis-point change in interest rates, which bond has the greatest percentage change in price? A. Bond A B. Bond B C. Can't be determined
5. Look at the following data: i l-year bond, ti" t+1 5 percent premium = 0 i't +2 i't +3 5.78 percent 5.88 percent 5.65 percent premium = 0.10 premium = 0.22 premium = 0.33 Based on the data, do the following: a. Compute the interest rate on a 2-year, 3-year, and 4-year bond using expectations theory and then draw the corresponding yield curve. b. Compute the interest rate on a 2-year, 3-ycar, and 4-year bond using preferred habitat theory and then draw the corresponding yield curve.
Which of the following bonds will have the larger price change (dollar value) for a 75- basis point change in yield? A. A $120 dollar bond with duration 2.25 B. A $70 dollar bond with duration 3.25 C. A $160 dollar bond with duration 1.75 D. A $200 dollar bond with duration 1.25 E. A $300 dollar bond with duration 0.75
Consider the following bonds. Bond A B с D Coupon Rate (annual payments) 0.0% 0.0% 3.5% 7.8% Maturity (years) 10 15 15 10 Which of the bonds A to D is most sensitive to a 1% drop in interest rates from 6.7% to 5.7%? Which bond is least sensitive? Provide an intuitive explanation for your answer.
Consider a one-year discount bond that has a present value of P1,500. If the rate of discount is 4 percent, the future value of the bond (the amount the bond pays in one year) is? a. P1,560.00 b. P1,540.00 c. P1,440.00 d. 1,442.31
еВook Problem Walk-Through Last year Carson Industries issued a 10-year, 13% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,065 and it sells for $1,200. a. What are the bond's nominal yield to maturity and its nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places. YTM: % YTC: % Would an investor be more likely to earn the YTM or the YTC? -Select- -Select- ent yield and to Table 7.1) Round your answer to two decimal places. b. Since the YTM is above the YTC, the bond is likely to be called. Since the YTC is above the YTM, the bond is likely to be called. Since the YTM is above the YTC, the bond is not likely to be called. Since the YTC is above the YTM, the bond is not likely to be called. Since the coupon rate on the bond has declined, the bond is not likely to be called. I. If the bond is called, the capital gains yield will remain the same but the current yield will be…
B. Directions: Compute for the following given statement and justify your answer. 1. Consider two bonds. Bond A has a face value of P100,000 and a stated rate of 12%. Bond B has a face value of P100,000 and a stated rate of 8%. Both bonds have the same maturity. Which bond has the greatest interest rate risk? 2. Consider two bonds. Bond X has a face value of P100,000 and five years remaining to maturity. Bond Y has a face value of P100,000 and ten years remaining to maturity. Both bonds have the same stated rate of 12%. Which bond has the greatest interest rate risk?
If a P1,000 bond sells for P1,125, which of the following statements are correct? I. The market rate of interest is greater than the coupon rate on the bond. II. The coupon rate on the bond is greater than the market rate of interest. III. The coupon rate and the market rate are equal. IV. The bond sells at a premium. V. The bond sells at a discount. a. I and IV b. I and V c. II and IV d. II and V

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