Your client is considering one of the two corporate bonds given below. Both bonds pay semi-annual coupons and are currently trading at the same price of ₵102.35. Characteristic Bond A Bond B Market price ₵102.35 ₵102.35 Maturity 2025 2025 Coupon 15% 18% Yield to maturity 10% 13% Macaulay Duration 4.1 years 3.9 years Call Features Noncallable Callable after 18 months at ₵105.00 Using the information in the table above, estimate the percentage price change and the new price for both bonds if the yield falls by 50 basis Briefly discuss why the actual price changes in the two bonds might differ from your estimates calculated in (i) above if the yields actually fall by 50 basis 3. In each case indicate whether the actual price will be higher or lower than the estimated price and why. (Credit will be given for graphical illustration of concepts)
Your client is considering one of the two corporate bonds given below. Both bonds pay semi-annual coupons and are currently trading at the same price of ₵102.35. Characteristic Bond A Bond B Market price ₵102.35 ₵102.35 Maturity 2025 2025 Coupon 15% 18% Yield to maturity 10% 13% Macaulay Duration 4.1 years 3.9 years Call Features Noncallable Callable after 18 months at ₵105.00 Using the information in the table above, estimate the percentage price change and the new price for both bonds if the yield falls by 50 basis Briefly discuss why the actual price changes in the two bonds might differ from your estimates calculated in (i) above if the yields actually fall by 50 basis 3. In each case indicate whether the actual price will be higher or lower than the estimated price and why. (Credit will be given for graphical illustration of concepts)
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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Your client is considering one of the two corporate bonds given below. Both bonds pay semi-annual coupons and are currently trading at the same price of ₵102.35.
|
Characteristic |
Bond A |
Bond B |
|
Market price |
₵102.35 |
₵102.35 |
|
Maturity |
2025 |
2025 |
|
Coupon |
15% |
18% |
|
Yield to maturity |
10% |
13% |
|
Macaulay Duration |
4.1 years |
3.9 years |
|
Call Features |
Noncallable |
Callable after 18 months at ₵105.00 |
- Using the information in the table above, estimate the percentage price change and the new price for both bonds if the yield falls by 50 basis
- Briefly discuss why the actual price changes in the two bonds might differ from your estimates calculated in (i) above if the yields actually fall by 50 basis
3. In each case indicate whether the actual price will be higher or lower than the estimated price and why. (Credit will be given for graphical illustration of concepts)
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