Compute the duration for bond C, and rank the bonds on the basis of their price volatility.
Question:
Confirm your ranking by calculating the percentage change in the price of each bond when interest rates rise from 8 to 12 percent. (Bond As and Bs prices become $774 and $1,000,respectively.)
Duration Coupon 8% 12% 8% Term 10 years 10 years 5 years Bond 7.25
Step by Step Answer:
The duration for Bond C D 1 12 1 12 1008 12 4222 12 081 12 5 1 12 The ran...View the full answer
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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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