Both Bond Sam and Bond Dave have 8 percent coupon rates, make semiannual payments, and are priced at par value. Bond Sam has 8 years to maturity, whereas Bond Dave has 15 years to maturity. If interest rates suddenly rise by .50 percent, what is the percentage change in the price of Bond Sam? Of Bond Dave? If the rates were to suddenly fall by .50 percent instead, what would the percentage change in the price of Bond Sam be then? Of Bond Dave? Illustrate your answers by graphing bond prices versus YTM. What does this problem tell you about interest rate risk of longer-term bonds?
Both Bond Sam and Bond Dave have 8 percent coupon rates, make semiannual payments, and are priced at par value. Bond Sam has 8 years to maturity, whereas Bond Dave has 15 years to maturity. If interest rates suddenly rise by .50 percent, what is the percentage change in the price of Bond Sam? Of Bond Dave? If the rates were to suddenly fall by .50 percent instead, what would the percentage change in the price of Bond Sam be then? Of Bond Dave? Illustrate your answers by graphing bond prices versus YTM. What does this problem tell you about interest rate risk of longer-term bonds?
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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Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Question
- Both Bond Sam and Bond Dave have 8 percent coupon rates, make semiannual payments, and are priced at par value. Bond Sam has 8 years to maturity, whereas Bond Dave has 15 years to maturity. If interest rates suddenly rise by .50 percent, what is the percentage change in the price of Bond Sam? Of Bond Dave? If the rates were to suddenly fall by .50 percent instead, what would the percentage change in the price of Bond Sam be then? Of Bond Dave? Illustrate your answers by graphing
bond prices versus YTM. What does this problem tell you about interest rate risk of longer-term bonds?
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