Exercise 1. (Do this problem by hand. Don't just put it in a program like Excel. I want to see your work.) Bond A is a three year zero coupon bond with par value of $1000 and price of $900. Bond B is a two year 7% coupon bond with par value of $1000 and price of $1000. • Compute the yield to maturity of each. Is the yield curve upward or downward sloping? • Compute the implied forward rate. • Compute the duration of each. • Compute the convexity of each.

Exercise 1. (Do this problem by hand. Don't just put it in a program like Excel. I want to see your work.) Bond A is a three year zero coupon bond with par value of $1000 and price of $900. Bond B is a two year 7% coupon bond with par value of $1000 and price of $1000. • Compute the yield to maturity of each. Is the yield curve upward or downward sloping? • Compute the implied forward rate. • Compute the duration of each. • Compute the convexity of each.

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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Investigating the principle that all bonds are priced to give the same total yield which is the current market rate of interest. REQUIRED: Create your own bond – i.e. the par value may be kept at 1000, but decide your own coupon rate, maturity period and current market rate of interest. Now compute your total yield which should consist of Current Yield plus Capital Gain/Loss Yield and find out if it equates the market rate of interest that you selected.
This is the entire question! Just answer A,B,C (Don't worry about the numbers for A&B) and answer the rest of the question. Complete the following table by identifying the appropriate corresponding variables used in the equation. Unknown Variable Name A (Bond Semi coupon annul payment, annual coupon payment,Bonds market price) B (Bond's semi coupon, annual coupon payment,par value) $1,000 C Semiannual required return Based on this equation and the data, it is (unreasonable,reasonal) to expect that Oliver’s potential bond investment is currently exhibiting an intrinsic value less than $1,000. Now, consider the situation in which Oliver wants to earn a return of 6.75%, but the bond being considered for purchase offers a coupon rate of 8.75%. Again, assume that the bond pays semiannual interest payments and has three years to maturity. If you round the bond’s intrinsic value to the nearest whole dollar, then its intrinsic value…
Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Show Transcribed Text B) How could you construct a 1-year forward loan beginning in year 3? (Face Value) C) How could you construct a 1-year forward loan beginning in year 4? (Face Value) Required A Required B Complete this question by entering your answers in the tabs below. Face value Rate of synthetic loan → Show Transcribed Text Price $ 970.93 898.39 836.92 How could you construct a 1-year forward loan beginning in year 3? Note: Round your Rate of synthetic loan answer to 2 decimal places. Required A 776.20 685.42 Required B Face value Rate of synthetic loan Required C 7.85 % Required C How could you construct a 1-year forward loan beginning in year 4? Note: Round your Rate of synthetic loan answer to 2 decimal places. Ċ 13.29 %
Please kindly assist d & e. Thank you. Two bonds A and B have the same credit rating, the same par value and the same coupon rate. Bond A has 30 years to maturity and bond B has five (5) years to maturity. Please demonstrate your understanding of interest rates risk by answering the following questions :a. Discuss which bond will trade at a higher price in the marketb. Discuss what happens to the market price of each bond if the interest rates in the economy go up.c. Which bond would have a higher percentage price change if interest rates go up?d. Please substantiate your argument with numerical examples.e. As a bond investor, if you expect a slowdown in the economy over the next 12 months, what would be your investment strategy? Provide your explanations and definitions in detail and be precise.
1. Pricing a bond in the secondary market: For each question, use the three methods we learned in class: plug in the values in the formula, handwrite the keys you enter in the Financial Calculator, and use Excel (formula and arguments). Use the Table below for each answer. a. Find the price of a 10-year 10% coupon (paid semiannually). The current yield to maturity is 5%. b. Find the price of a 10-year 5 % coupon (paid semiannually). The current yield to maturity is 10%. c. Based on your answers, discuss the relationship between coupon rate, yield to maturity, and bond price. FORMULA (Plug in the corresponding values in the formula below) 2 Financial Calculator (Indicate the keys you enter and write the answer) 3 Excel (Write the function and arguments in Excel)
1. table: Consider following three bonds whose features are summarized in the following Maturity (Years) Coupon Rate (%) YTM (%) Answer the following question by using Excel and show the cells that you use to calculate the values. 2 5 5.5 6 5 6 6 10 6.5 The face value of bonds is $100, YTM stands for yield to maturity, coupons are received annually. We structure a butterfly strategy (combination of bullet and barbell) in the following way: We sell 10000 5-year maturity bonds. We buy 5000 2-year maturity bonds and 5000 10-year maturity bonds. a) Suppose that one month later the YTM curve has changed. A flattening movement has happened so that the curve rotates around the body. We consider the following movement "+50/0/-50" meaning that the short wing YTM increases by 50 bps, the body does not move and the long wing YTM decreases by 50 bps. Compute the total return of the butterfly. b) Same question with a steepening movement "-50/0/+50".
Consider an economy with three dates (t=0,1,2) and two safe bonds. Bond A has 2% coupon and Bond B has 3% coupon. The payoffs and prices of the bonds are given as follows price at t=0 99.50 Bond A Bond B t=1 2 3 t=2 102 103 (a) Is there an arbitrage? (b) If yes, find an arbitrage portfolio. 100.25
Use of a financial calculator or Excel (functions PRICE and YIELD will be helpful) will be helpful to calculate the following problems. Show your work, include your calculator entries (i.e. N, PV, PMT, FV, IM, and/or Excel formulas where applicable. 1. Suppose there is a bond with a par value of $1,000 that matures in 6 years. Coupon payments are made annually. The coupon rate is 9%. It has a 12% yield to maturity. The annual coupon payments = $ b. The price of the bond today (present value) = $
After recently receiving a bonus, you have decided to add some bonds to your investment portfolio. You have narrowed your choice down to the following bonds (assume semiannual payments): a. Using the PRICE function, calculate the intrinsic value of each bond. Is either bond currently undervalued? How much accrued interest would you have to pay for each bond? b. Using the YIELD function, calculate the yield to maturity of each bond using the current market prices. c. Calculate the duration and modified duration of each bond.d. Which bond would you rather own if you expect market rates to fall by 2% across the maturity spectrum? What if rates will rise by 2%? Why?
9. Interest Rate Risk. Suppose that you are a fixed income portfolio manager at Bourbon Street Capital. You have the following bonds issued by Royal, Inc. and Chartres, LLC in your portfolio and you want to understand the risk profile of your portfolio. Given that both bonds pay semiannual coupons, answer the following questions. (Remember to convert your answer to units of full years.) Coupon Yield to maturity Maturity (years) Royal, Inc. Chartres, LLC. Bond A Bond B 9% 8% 5 $100.00 $104.055 8% 8% 2 Par $100.00 Price $100.00 (a) What is the DV01 (at current prices) for bonds A and B? (b) What are the Macaulay Durations (at current prices) for the two bonds? (c) What are the modified durations for the two bonds? (d) What is the convexity of the two bonds?
Hi Guys I just need the answer for PArt 2. Thank you This activity has two parts, please answer both Two bonds A and B have the same credit rating, the same par value and the same coupon rate. Bond A has 30 years to maturity and bond B has five (5) years to maturity. Please demonstrate your understanding of interest rates risk by answering the following questions : Discuss which bond will trade at a higher price in the market Discuss what happens to the market price of each bond if the interest rates in the economy go up. Which bond would have a higher percentage price change if interest rates go up? Please substantiate your argument with numerical examples. As a bond investor, if you expect a slowdown in the economy over the next 12 months, what would be your investment strategy? 2.Familiarity with random variables is essential to understand the basics of portfolio theory. Given that CLA2 assignment is about portfolio formation, you need to strengthen your skills in dealing…
A plot of the yields on bonds with different terms to maturity but the same risk, liquidity, and tax considerations is known as O A. a yield curve. B. a risk-structure curve. OC. a term-structure curve. 5- O D. an interest-rate curve. Suppose people expect the interest rate on one-year bonds for each of the next four years to be 3%, 6%, 5%, and 6%. If the expectations theory of the term structure of interest rates is correct, then the implied interest rate on bonds with a maturity of four years is nearest whole number). %. (Round your response to the 2- Refer to the figure on your right. Suppose the expected interest rates on one-year bonds for each of the next four years are 4%, 5%, 6%, and 7%, respectively. 1. 1.) Use the line drawing tool (once) to plot the yield curve generated. 3 Term to Maturity in Years 2.) Use the point drawing tool to locate the interest rates on the next four years. 5. 3- Interest Rate .....

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