You manage a $800M bond portfolio and own a bond with an annual coupon of 35 with 5 years to maturity. The bond currently trades at a yield to mautirty of 0.5% What is the coupon rate of the bond? What is the price of the bond? Assume that the bond has a duration of 4.5 years At ytm of 0.05% what is the current yield on the bond? What is the bonds modified duration If you anticipate that a downgrade in the bonds rating will result in an increase in bond’s yield to maturity to 1.25%, what is the expected percentage change in the bond price

A bond is a fixed-income security that represents an investor's obligation to a borrower (typically corporate or governmental). A bond is an I.O.U. between a lender and a borrower that includes the loan's conditions and payments. Bonds are issued by businesses, municipalities, states, and sovereign governments to fund projects and operations. Bondholders are the debtholders or creditors of the issuer. Bond specifications often include the end date for which the principal of the loan is anticipated to be paid to the bond owner, as well as the borrower's arrangements for variable or fixed interest payments.The coupon rate is the annual income an investor may anticipate to earn from a bond. It is determined at the time the bond is issued and is computed by dividing the total yearly coupon payments by the par value. A bond's yield to maturity and coupon rate are the same at the moment it is acquired. Calculation: 1).Coupon Rate=Coupon AmountFace value of bond×100=35800×100=4.375% 2).Price of Bond = Present Value of future cash flows = Present value of all coupons+Present value ofpricipal = 35 × PVAFI( 0.50%, 5 ) + 800×PVFI( 0.50%, 5) = 172.41 + 780.2965 =952.7065 1). Calculation of the current yield of the bond: Because the current market price is not stated in this question, and the YTM, or yield to maturity, has been reduced from 0.50 percent to 0.05 percent, Now we have to estimate the current market price of the bond: Current Price of the Bond=PV of the Bond + PV of Principle = 35 (0.05%, 4.5) + 800(0.05%, 4.5) =157.287 + 798.24 = 955.527Current Yield=Coupon AmountCurrent Value of Bond×100=35955.527×100=3.6629 2).Calculation of Bond's Modified Duration: Duration =(Weightage Cashflows/ Present Value Total)=4020.1318/955.527 = 4.20 yearsModified duration= Duration / (1+YTM) = 4.20/((1+0.0005)) = 4.1979 YEARS 3). Duration=5 yearsYTM=0.5Change in YTM=1.25 % Change in Bond Price=5×0.5-1.251+0.575=5×-0.750.755=5×-0.99337=-4.966% Hence, the expected percentage change in the bond price is -4.96%.

Answered: You manage a $800M bond portfolio and own a bond with an annual coupon of 35 with 5 years to maturity. The bond currently trades at a yield to mautirty of 0.5%…

Essentials Of Investments

11th Edition

ISBN: 9781260013924

Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher: Mcgraw-hill Education,

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Question

You manage a $800M bond portfolio and own a bond with an annual coupon of 35 with 5 years to maturity. The bond currently trades at a yield to mautirty of 0.5%

What is the coupon rate of the bond?
What is the price of the bond?

Assume that the bond has a duration of 4.5 years

At ytm of 0.05% what is the current yield on the bond?
What is the bonds modified duration
If you anticipate that a downgrade in the bonds rating will result in an increase in bond’s yield to maturity to 1.25%, what is the expected percentage change in the bond price

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