Question
1. A corporate bond has 2 years to maturity, a coupon rate of 8%, a face value of $1,000 and pays coupons semiannually. The market
1. A corporate bond has 2 years to maturity, a coupon rate of 8%, a face value of $1,000 and pays coupons semiannually. The market interest rate for similar bonds is 9.5%.
a. What is the bond's duration in years?
b. If yields fall by 0.8 percentage points, what is the new expected bond price based on its duration (in $)?
c. What is the actual bond price after the change in yields (in $)?
d. What is the difference between the two new bond prices (in absolute $)?
2. A corporate pension plan has to make the following payments over the next few years:
Year | 1 | 2 | 3 | 4 |
Amount ($ million) | 19 | 23 | 29 | 37 |
The appropriate interest rate is 8%.
a. What is the duration of the liability?
b. What is the duration of a perpetuity if the yield is 8%?
c. The fund wants to immunize its interest rate risk by investing in a perpetuity and a 1-year zero coupon bond. To do so, how much should it invest in the perpetuity (in $ million)?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started