Question
11/8/16 the yield on the 10 year Treasuries was 1.88% It was predicted the yield would fall to 1.50% after the election, On 11/9/16 yields
11/8/16 the yield on the 10 year Treasuries was 1.88%
It was predicted the yield would fall to 1.50% after the election, On 11/9/16 yields moved to 2.07% and by 11/16/22 yields were 2.22%. On 12/9/22 yields finished the day at 2.47%
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Assume that a pension fund manager, and bought $1 billion (Future value) of zero coupon bonds on November 8 because of prediction made about 1.5%. The bonds pay no interest. Time = 10 years for all calculations below.
a) How much did the investor pay for the bonds on November 8?
b) How much did the investor gain or lose between November 8 and December 9; assume t=10. Was this a fun ride?
c) What is the duration of the bonds bought on November 8? What is refinancing risk?
d) Modigliani & Miller (M&M 1958 this is the most important paper in Finance) assumed no defaults in the bond market. If a bond investor holds a bond to maturity, and given M&M, does the Mark-to-market matter? Why or why not?
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