Consider the following bond portfolio: Bond Value Maturity A B C $300 million 3 300 400 years 4 8 Coupon 0% 6 Yield 10% 10 10 a) What is the bond portfolio's duration? b) Calculate the capital loss on this portfolio if the yield increases from 10 to 12 percent. c) Suppose the portfolio is to be immunized over an investment horizon of approximately 5.19 years. Determine the market value of the immunized portfolio at the end of 5.19 years.

Consider the following bond portfolio: Bond Value Maturity A B C $300 million 3 300 400 years 4 8 Coupon 0% 6 Yield 10% 10 10 a) What is the bond portfolio's duration? b) Calculate the capital loss on this portfolio if the yield increases from 10 to 12 percent. c) Suppose the portfolio is to be immunized over an investment horizon of approximately 5.19 years. Determine the market value of the immunized portfolio at the end of 5.19 years.

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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Bond X has 20 years to maturity, a 8% annual coupon, and a R 1,000 face value. The required rate of return is 12%. Suppose you want to buy the bond and you plan to hold the bond for 6 years. You expect that in 6 years, the yield to maturity on a 15-year bond with similar risk will be pricedto yield 8.5%. How much would you like to pay for the bond today?
Consider a coupon bond with a 5% coupon rate. It will mature in 2 years and its yield to maturity is 10%. If its yield to maturity increases to 12% over the course of the next year, what is the return on the bond assuming ít will be held for 1 year?
You plan to buy an 8% coupon 8-year maturity bond when market rate of return of similar bond is 10%. a) Calculate the proper price for this bond. b) TWO years later, the market rate has changed to 9% and the price of your bond has also changed accordingly. If you sell this bond at the market price, what is the ANNUAL rate of return from your investment in this bond? c) What will be your real rate of return over the two years if inflation rate is 3% in the first year and 5% in the second?
2.Consider a portfolio of 3 bond A and 2 Annuity B, the yield rate is i=5% for A and B. Bond A: F= C = $1000, 4-year with annual coupon at 4%, Annuity B: A one-year deferred annuity-immediate with 3 level payments 50. (1) What is the PV of this portfolio? (2) Find the Macaulay Duration D, and Dg (3) Find the Modified Duration MD and MDg (4) Find the Modified Duration for the portfolio. (5) Use modified approximation to estimate the change in PV when both bond yield rate rise by 0.2%
Assume that the Pure Expectations Theory of the term structure is correct. Also assume that the interest rate today on a 9-year security is 6.40%, while the interest rate today on a 15-year security is 8.00%. Finally assume that the interest rate on a 3-year security to be bought at Year 9 and held over Years 10, 11, and 12 is 6.80%. Given this information, determine the average annual return that investors today must expect that they will receive from investing in a 3-year security in 12 Years (that is, buying the security at Year 12 and holding it over Years 13, 14, and 15). O 13.00% O 12.50% 13.50% O 12.00% O 14.00%
D2) You are asked to invest $30 million in a bond portfolio consisting of only two bonds. Bond A has a yield of 6% and is a 5 year coupon bond a duration of 4.36 years, and bond B has a yield 7% and is a 7 year coupon bond duration of 6.50 years. The portfolio is to have an investment horizon of 5 years. How much of each bond issue would you have to buy to immunize the portfolio? A. Invest in 70 percent bond A and 30 percent bond B. B. Invest in 60 percent bond A and 40 percent bond B. C. Invest in 30 percent bond A and 70 percent bond B D. Invest in 40 percent bond A and 60 percent bond B
Assume that the bond from problem #1 reaches maturity in 5 years instead of 15 years, with the same coupon rate and par value. What would the relevant market prices be at 10%, 5%, and 14% required market rates of return?
Example: Suppose that a bond has a face value of P100,000and its maturity date is 10 years from now. The coupon rate is5% payable semi-annually. Find the fair price of this bond, assuming that the annual market rate is 4%. Given: Coupon rate r= 5%, payable semi - annually Face Value = 100,000 Time to maturity = 10 years Number of periods = 2(10) = 20 Market rate = 4% The bondholder receives 20 payments of P2,500 each, and P100,000 at t = 10. Present Value of 100,000: F P =- 100000 = 67,556.42 1+ 0.0410 Present Value of 20 payments of Php2500 each: Convert 4% to equivalent semi-annual rate: 1+ jm 0.04 1= (1+=)" -1 - (1+ ) - 1 - 1 = m 2 | = 0.0404
Assume you have a 1 year investment horizon. A bond has 10% year coupon rate and pays the coupon once per year. The bond matures in 10 years and is priced to yield 8% this year. If you expect the yield to maturity on the bond to be 7% at the beginning of the next year, what is your holding period return, assuming you have received the coupon for this year.
Consider a bond with a duration of 8.8 years priced at $1,100. If market interest rates were to increase by 0.25%, what would be the predicted new bond price according to duration?
a) Assume the yield to maturity on a 10 year Australian government bond is 2% and the market risk premium is 5%. what is the expected rate of return on a share with market average systematic risk? provide workings and explain beta value used it is b) explain what happens to the risk of a portfolio as the number of assets in the portfolio is increased?
36. You are analyzing the leverage of two firms and you note the following (all values in millions of dollars): Debt Book Equity Market Equity ЕBIT Interest Expense Firm A 495.8 297.7 401.1 106.8 45.2 Firm B 83.8 38.3 35.9 8.4 7.5 a. What is the market debt-to-equity ratio of each firm? b. What is the book debt-to-equity ratio of each firm? c. What is the interest coverage ratio of each firm? d. Which firm may have more difficulty meeting its debt obligations? Explain.

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