a. You own a two-bond portfolio. Each has a par value of $1000. Bond A matures in

Question:

a. You own a two-bond portfolio. Each has a par value of $1000. Bond A matures in 5 years, has a coupon rate of 8 percent, and has a annual yield to maturity of 9.20 percent. Bond B matures in 15 years, has a coupon rate of 8 percent and has an annual yield to maturity of 9.20 percent. Both bonds pay interest semiannually. What is the value of your portfolio? What happens to the value of your portfolio if each yield to maturity rises by one percentage point?

b. Rather than own a 5-year bond and a 15-year bond, suppose you sell both of them and invest in two 10-year bonds. Each has a coupon rate of 8 percent paid semiannually and has a yield to maturity of 9.20 percent. What is the value of your portfolio? What happens to the value of your portfolio if the yield to maturity on the bonds rises by one percentage point?

c. Based upon your answers to parts a) and b), evaluate the price changes between the two portfolios. Were the price changes the same? Why or why not?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...