Both Bond A and Bond B have 8% coupon rate. Bond A has 4 years to maturity, while Bond B is 14 years to maturity. Both bonds have 10% yield to maturity (YTM), and make semi- annually payment i. If interest rates increase by 4%, determine the percentage price change of both bonds. ii. If interest rate decrease by 4%, determine the percentage price change for both bonds iii. Explain the concept of maturity and coupon bonds based on the answer in part and ii.

Both Bond A and Bond B have 8% coupon rate. Bond A has 4 years to maturity, while Bond B is 14 years to maturity. Both bonds have 10% yield to maturity (YTM), and make semi- annually payment i. If interest rates increase by 4%, determine the percentage price change of both bonds. ii. If interest rate decrease by 4%, determine the percentage price change for both bonds iii. Explain the concept of maturity and coupon bonds based on the answer in part and ii.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 4P: Determinant of Interest Rates The real risk-free rate of interest is 4%. Inflation is expected to be...

See similar textbooks

Similar questions

Determinant of Interest Rates The real risk-free rate of interest is 4%. Inflation is expected to be 2% this year and 4% during each of the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities?
K Assume that a bond will make payments every six months as shown on the following timeline (using six-month periods): 0 2 5 Period $19.53 a. What is the maturity of the bond (in years)? b. What is the coupon rate (as a percentage)? c. What is the face value? Cash Flows View an example Get more help. ★ a. What is the maturity of the bond (in years)? The maturity is years. (Round to the nearest integer.) A 6 1 MacBook Pro & 7 $19.53 * 8 9 C 59 $19.53 60 $19.53+$1,000 Clear all BUB 0 {
Question 4 The following is a list of prices today for bonds with different maturities. Face value is 100. Assume that the bonds pay their coupons annually, and that the YTMs in the table are annualized and compounded annually. Both coupon rate and yield to maturity (YTM) is in percent. Maturity (years) Price Coupon rate YTM 1 98.00 0 ?2 100 ? 5.00 3?9 6.00 Fill in the missing values in the table.What are the annualized spot rates for years 1 & 2 (r1 & r2)? Given r1 & r2, what is the price of a 2-year coupon bond with annual coupon rate of 7%? What is the duration of this bond?
QUESTION 7 Consider the market for a bond which has a face value of $2,000, pays a coupon of $100, and matures in 1 year (that is, you will get the face value and one coupon payment next year). Suppose the demand for such bonds is given by P=4,000-2Q, and that the supply of such bonds is given by P=1,000+Q. What is the yield to maturity if one were to purchase the bond at the equilibrium price? 5% .05% 10% .10%
Question 1 : Consider a coupon bond with an 8% annual coupon rate, a 10% interest rate, and a $1000 face value. The bond will mature in 4 years. What is the duration of this bond? Duration is defined as a weighted average of the maturities of the cash payments. Suppose the weight assigned to the maturity of 1 year is W. Show your work. No work, no credit A: Duration 2.28 and W=7.77% B: Duration=3.56 and W-20.5% C. Duration 3.56 and W-23.1% D. Duration=3,56 and W-7.77%
Question 1. Duration and Banking Consider a 5-year bond with annual coupon payments. The bond has a face value (prin- cipal) of $100 and sells for $95. Its coupon rate is 3%. (The coupon rate is the ratio between the coupon value and the face value). The face value is paid at the maturity year in addition to the last coupon payment. 1. Calculate the bond's yield to maturity (YTM) and duration using its YTM. 2. Suppose the bond's YTM changes in the same way as a 5-year T-bill interest rate. Use the bond's modified duration to evaluate the relative change in the 5-year bond's value if the interest rate on 5-year T-bills falls by one basis point, that is, by 0.0001. This part was extracted from the balance sheet of the First Bank of Australia: Assets (Billion AUD) Bond 80 Liabilities (Billion AUD) Fixed-rate liabilities 60 where "Bond" here refers to the bond we specified above and the fixed-rate liabilities (banks future payment obligations) have an average duration of 4 years and YTM of…
Question 1: Consider a coupon bond with an 8% annual coupon rate, a 10% interest rate, and a $1000 face value. The bond will mature in 4 years. What is the duration of this bond? Duration is defined as a weighted average of the maturities of the cash payments. Suppose the weight assigned to the maturity of 1 year is W. A: Duration=2.28 and W=7.77% B: Duration=3.56 and W=20.5% C: Duration=3.56 and W=23.1% D: Duration=3.56 and W=7.77%
Question two Using the following data, estimate the new bond prices of each of the 3 bonds if their yields (interest rates) increase by 0.3%. You should take into account both duration and convexity. Company Maturit Coupo Payment Duratio Yield y Date frequency BP Rio Tinto 2033 Severn Trent 2021 ΔΡ P 2058 n 3.561% Semi- annual 6.125% semi-annual 12.89 n 1.457% semi-annual 24.053 -×100 = (– D™ × Ay×100) + m 8.217 2 The percentage change in the bond price is estimated: 3.11% 78.935 Convexity 4.635% 229.86 4.773% 878.73 ×Convexity× (Ay)² × 100 Bond Price (TZS) 104.52 120.36 37.92
Question 3 A$100 000 bond has 3 years to maturity, and 8% p.a. coupon rate (paid annually). The current yield rate is 10%. Required: a) What is the duration of this bond? b) What is the price of this bond? c) If the current yield is decreased by 100 basis points, 1) What is the percentage change in bond price using the duration approach? 2) What is the price of this bond with this new yield rate?
Question 1 Graystone bonds have a maturity value of RM100. The bonds carry a coupon rate of 10 percent. Interest is paid semi-annually. The bonds will mature in nine years. If the current market price is RM96.50, a.what is the yield to maturity on the bond? b.what is the current yield on the bond? Give typing answer with explanation and conclusion
Question 2 Two bonds are available for purchase in the financial markets. The first bond is a two-year, 50,000 AUD bond that pays an annual coupon of 6 per cent. The second bond is a two- year, 10,000 AUD, zero-coupon bond. (a) What is the duration of the coupon bond if the current yield-to-maturity (R) is 6 per cent? And 8 per cent? How does the change in the current yield to maturity affect the duration of this coupon bond? (b) Calculate the duration of the zero-coupon bond with a yield to maturity of 5 per cent, and 8 per cent.
1 Derive i, +i iz, lt It+1 2 2 According to the Expectations Theory of the term structure, if interest rates are expected to be 2%, 2%, 4%, and 5% over the next four years, what is the yield on a three-year bond today?