Suppose you have an obligation to pay € 56 000 in 8 years time. To avoid interest risk you intend to hedge with two bonds. You can use one zero coupon bond that matures 10 years from now and one bond that pays coupons once a year at the rate of 5% and matures in 3 value of 100. Assume a flat yield curve. years with face a (a) What amount do you have to invest in each of the two bonds during the first year to hedge your obligation if the yield is 5%? What is the payoff at maturity (face value) of your investment in the zero coupon bond? How many units of the coupon bond do you have to buy? (Assume that you can buy any fractional amount of the bonds.) (b) What is the value of your portfolio today if immediately after the investment the market rate falls to 4%? What will be the value in 8 years if interest rates will not change again?

Suppose you have an obligation to pay € 56 000 in 8 years time. To avoid interest risk you intend to hedge with two bonds. You can use one zero coupon bond that matures 10 years from now and one bond that pays coupons once a year at the rate of 5% and matures in 3 value of 100. Assume a flat yield curve. years with face a (a) What amount do you have to invest in each of the two bonds during the first year to hedge your obligation if the yield is 5%? What is the payoff at maturity (face value) of your investment in the zero coupon bond? How many units of the coupon bond do you have to buy? (Assume that you can buy any fractional amount of the bonds.) (b) What is the value of your portfolio today if immediately after the investment the market rate falls to 4%? What will be the value in 8 years if interest rates will not change again?

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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Hello Can you show how the computation was made from the solutions guide
You have a risk-free bond with 2 years to maturity. The bond has a face value of $ 1000 and a coupon rate of 5%. The next coupon will be paid one year from now, and the bond pays annual coupons. a. What is the price of the bond? What is its own yield to maturity? Is it trading at a discount or at a premium? b. Suppose you buy the 2-year bond above, and you sell it after one year. What is the expected return on your investment?Kindly solve the question in 10 mins. It is urgent.

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