Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Assignment 3: Rates and Interest Rate Sensitivity Section 1: Duration and bond characteristics The textbook (Bodie, Kane, & Marcus, 2021) gives you a number of

Assignment 3: Rates and Interest Rate Sensitivity Section 1: Duration and bond characteristics The textbook (Bodie, Kane, & Marcus, 2021) gives you a number of rules regarding duration and bond characteristics. These questions ask you to verify each rule and train you in calculating interest rates, duration, and interest rate sensitivity. Rule 1: The duration of a zero-coupon bond equals its time to maturity. 1.1. Explain rule 1 using an example. (1 point) Rule 2: Holding maturity constant, a bonds duration is lower when the coupon rate is higher. 2.1. Calculate the duration of a 3-year coupon-bond with face value $100 and coupon rate 3% selling at par. (2 points) 2.2. Calculate the duration of a 3-year coupon-bond with face

Duration is only an approximation for small changes in interest rates. 1.1. Using the duration you calculated for the 3-year 3% coupon-bond selling at par in question 2.1., what is the interest rate sensitivity of this bond to a 2 percentage point change (2%) in interest rates? (2 points) 1.2. Calculate the present value of the 3-year 3% coupon-bond using a yield to maturity of 5%. (1 point) 1.3. Compare the decrease in price (from par to the present value you calculated) to the interest rate sensitivity you calculated. Are they exactly equal? (1 point) Section 3: Application to recent data Explain 4 graphs in the ECBs latest Monetary policy transmission brief. (8 points).

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Management For Public, Health, And Not-for-Profit Organizations

Authors: Steven A. FinklerDaniel L. Smith, Thad D. Calabrese

6th Edition

978-1506396811, 150639681X

More Books

Students also viewed these Finance questions

Question

=+Is it a site that explores new technology?

Answered: 1 week ago

Question

=+Where can you initiate a dialogue (when appropriate)?

Answered: 1 week ago

Question

=+ Does this site have scientific, medical, or legal advice?

Answered: 1 week ago