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a. Using the information in the following table, calculate the projected price change for Bond B if

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a. Using the information in the following table, calculate the projected price change for
Bond B if the yield to maturity for this bond falls by 75 basis points.
b. Describe the shortcoming of analyzing Bond A strictly to call or to maturity. Explain an approach to remedy thisshortcoming.
a. Using the information in the following table, calculate the
Transcribed Image Text:

LAUREN CORPORATION BOND INFORMATION (AS OF 2012) Maturity Coupon Current price Yield to maturity Modified duration to maturity Convexity to maturity Call date Call price Yield to call Modified duration to call Convexity to call Bond A (Callable) 2022 11.50% 125.75 7 70% 6.20 0.50 2016 105 5.10% 3.10 0.10 Bond B (Noncallable) 2022 7.25% 100.00 7.25% 6.80 0.60

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a If yieldtomaturity YTM on Bond B falls 75 basis points 75 basis points 75100 75 D in YTM Projected ...View the full answer


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Investment Analysis and Portfolio Management

Investment Analysis and Portfolio Management

ISBN: 978-0538482387

10th Edition

Authors: Frank K. Reilly, Keith C. Brown

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Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.

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