Part 1. Institutional investing 1. A) Describe briefly each of the following measures, and Bond 01 Bond 02 Face value $1,000 $1,000 4.5% 6% 12 12 B) Calculate the current yield (cy), Coupon (yearly) the yield to maturity (ytm), and the present value (pv) of Maturity (years) the bond (also known as "fair value) for the following Price bonds. Current yield C) Why would the Yield to maturity price of Bond 02 be Present value (assume the lower than the price required rate equals the ytm.) of Bond 01, when its coupon rate is higher? $1,100 $950 2. A) Describe what the realized compound yield (rcy) is, and B) Calculate it for each bond in the following cases: a) no change in reinvestment rates (rr), (reinvestment rate equal to the ytm); b) increase in the reinvestment rate, rr = 5%, and c) decrease in rr = 2%. For example, given that the maturities are the same as the one in the Excel file, one way is to use the table starting in "bond terms, Realized compound yields, G26". Another, more straightforward way is the one shown in "bond terms, U49", under the label BEST WAY. In any case, you only need to plug in your numbers and comment on the results. Bond 01 Bond 02 a) rr = ytm (ytm calculated above)(ytm calculated above) b) rr=5% Bond 1 rcy = Bond 2 rcy = c) rr=2% Bond 1 rcy = Bond 2 rcy = 3. A) What are the major risks for institutional investors investing in bonds? 1. Calculate the duration of the bonds from question 1, and explain what it means Bond 01 duration =: Bond 02 duration=. 2. Describe immunization, in general and for each of the previous bonds, and explain how it is used by institutional bond investors. |