Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider a 2-year, risk-free bond with a coupon rate of 6% (annual coupons) and a face amount of $1,000. What is price of this bond

  1. Consider a 2-year, risk-free bond with a coupon rate of 6% (annual coupons) and a face amount of $1,000.

    1. What is price of this bond if the YTM is 5%? 6%? 7%?

    2. If you buy the bond for $1,000 (YTM = 6%), hold it to maturity and you reinvest the

      coupon payment at 5%, what is the annual HPR on your investment?

    3. If you buy the bond for $1,000 (YTM = 6%), then the yield increases to 7%, and you sell

      the bond immediately after the first coupon payment (in 1 year), what is your HPR?

    4. If the yield on the bond is 6% (P = $1,000),

      1. What is the Macaulay duration?

      2. If the yield increases to 7% immediately, what does the duration approximation

        predict will be the percentage change in the bond price?

      3. If the yield increases to 7% immediately, what is the actual percentage change in

        the bond price?

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

Essential Mathematics For Economic Analysis

Authors: Knut Sydsaeter, Peter Hammond, Arne Strom

4th Edition

0273760688, 9780273760689

More Books

Students also viewed these Finance questions

Question

What are the responsibilities of the position?

Answered: 1 week ago

Question

Appreciate important legal implications of performance appraisals

Answered: 1 week ago