Assume that you own a $ 1 million par value corporate bond that pays 7% in coupon interest (3.5% semiannual), has 4 years remaining to maturity, and is immediately callable at par. Its current market yield is 7% and it is priced at par. If rates on comparable securities fall by more than 40 basis points (0.2% semiannually), the bond will be called (a) Calculate the bonds price if the market rate increases by 50 basis points (0.25% semiannually) using the present value formula from (b) Calculate the bonds effective duration assuming a 50 basis point increase or decrease in market rates
Assume that you own a $ 1 million par value corporate bond that pays 7% in coupon interest (3.5% semiannual), has 4 years remaining to maturity, and is immediately callable at par. Its current market yield is 7% and it is priced at par. If rates on comparable securities fall by more than 40 basis points (0.2% semiannually), the bond will be called (a) Calculate the bonds price if the market rate increases by 50 basis points (0.25% semiannually) using the present value formula from (b) Calculate the bonds effective duration assuming a 50 basis point increase or decrease in market rates
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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Assume that you own a $ 1 million par value corporate bond that pays 7% in coupon interest (3.5% semiannual), has 4 years remaining to maturity, and is immediately callable at par. Its current market yield is 7% and it is priced at par. If rates on comparable securities fall by more than 40 basis points (0.2% semiannually), the bond will be called (a) Calculate the bonds price if the market rate increases by 50 basis points (0.25% semiannually) using the present value formula from (b) Calculate the bonds effective duration assuming a 50 basis point increase or decrease in market rates
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