EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 16, Problem 17PS
Summary Introduction
Adequate information
| Characteristic pertaining to fixed rate note and fixed rate bond | ||
| Price | Fixed Rate Bond | Fixed Rate Note |
| Price | 107.18 | 100 |
| YTM | 5% | 5% |
| Time remaining for maturity | 18 | 8 |
| Duration (Modified) | 6.9848 | 3.5851 |
To determine:
The most optimum strategy amongst the three, lengthen the portfolio duration, buy fixed rate bonds and shorten the portfolio duration.
Introduction:
Fixed rate bond is one of the kind of debt instrument which comprises of fixed interest (coupon) payment in comparison to floating rate bond. Fixed rate note is generally issued for a long period of time and has a predetermined rate of interest. Duration on the other hand, refers to the measure of price of bond sensitivity with respect to changes in the rate of interest.
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Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice,
is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions.
Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed-rate bond and note. Both the bond and note have
semiannual coupon periods. Unless otherwise stated, all interest rate changes are parallel. The characteristics of these securities are
shown in the following table. He also considers a 9-year floating-rate bond (floater) that pays a floating rate semiannually and is
currently yielding 5%.
Characteristics of Fixed-Rate Bond and Fixed-Rate Note
Fixed-Rate Fixed-Rate
Note
Bond
107.18
5.00%
9
100.00
5.00%
4
6.9848
3.5851
Price
Yield to maturity
Time to maturity (years)
Modified duration (years)
Spice asks Meyers to quantify price changes from changes in interest rates. To illustrate, Meyers computes…
Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice,
is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions.
Specifically, Spice would like to know how fixed-income managers position portfolios to capitalize on their expectations of future
interest rates.
Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed-rate bond and note. Both bonds have semiannual
coupon periods. Unless otherwise stated, all interest rate (yield curve) changes are parallel. The characteristics of these securities are
shown in the following table. He also considers a nine-year floating-rate bond (floater) that pays a floating rate semiannually and is
currently yielding 5%.
Characteristics of Fixed-Rate Bond and Fixed-Rate Note
Price
Yield to maturity
Time to maturity (years)
Modified duration (years)
Fixed-Rate Bond Fixed-Rate Note…
Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investiment Committee, Fred Spice, is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions. Specifically, Spice would like to know how fixed-income managers position portfolios to capitalize on their expectations of future interest rates.
Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed-rate bond and note. Both bonds have samiannual coupon periods. Unless otherwise stated, all interest rate (yield curve) changes are parallel. The characteristic of these securities are shown in the following table. He also considers a nine-year floating-rate bond (floater) that pays a floating rate semiannually and is currently yielding 5%.
Fixed-rate bond: price 107.18, YTM 5%, TMT (years) 18, modified duration (years) 6.9848.
Fixed-rate note: price 100, YTM 5%, TMT (years) 8, modified duration…
Chapter 16 Solutions
EBK INVESTMENTS
Ch. 16 - Prob. 1PSCh. 16 - Prob. 2PSCh. 16 - Prob. 3PSCh. 16 - Prob. 4PSCh. 16 - Prob. 5PSCh. 16 - Prob. 6PSCh. 16 - Prob. 7PSCh. 16 - Prob. 8PSCh. 16 - Prob. 9PSCh. 16 - Prob. 10PS
Ch. 16 - Prob. 11PSCh. 16 - Prob. 12PSCh. 16 - Prob. 13PSCh. 16 - Prob. 14PSCh. 16 - Prob. 15PSCh. 16 - Prob. 16PSCh. 16 - Prob. 17PSCh. 16 - Prob. 18PSCh. 16 - Prob. 19PSCh. 16 - Prob. 20PSCh. 16 - Prob. 21PSCh. 16 - Prob. 22PSCh. 16 - Prob. 23PSCh. 16 - Prob. 24PSCh. 16 - Prob. 25PSCh. 16 - Prob. 1CPCh. 16 - Prob. 2CPCh. 16 - Prob. 3CPCh. 16 - Prob. 4CPCh. 16 - Prob. 5CPCh. 16 - Prob. 6CPCh. 16 - Prob. 7CPCh. 16 - Prob. 8CPCh. 16 - Prob. 9CPCh. 16 - Prob. 10CPCh. 16 - Prob. 11CPCh. 16 - Prob. 12CPCh. 16 - Prob. 13CP
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