Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Please Show the calculation and the explanation Yield Corporate Bond 12% 9% Government Bond 8 % 6% Year 1 Year 2 Maturity 1. How to
Please Show the calculation and the explanation Yield Corporate Bond 12% 9% Government Bond 8 % 6% Year 1 Year 2 Maturity 1. How to read the figure above? A. We hold 2-year corporate bonds, we receive interest of 9% in year I and 12% in year2. B. We hold 2-year government bonds, we receive interest of 8% per-year for two year C. We hold 2-year government bonds, we receive interest rates of 8% in year 1 and 9% in year 2, which is the expected interest rate in year 2. D. We can buy a one year corporate bond and short one year government bond to arbitrage the situation above E. None above 2. Suppose a bond has a value of $ 2 million and duration is 4 years. Current interest rate is 10%. If the interest rate changes by 1% (interest rate becomes 11%), what is the new value for the bond? A. $1,623 B. $1,963 C. $1,801 D. $1,927 E. None above 3. Ceteris paribus, if we expect that interest rate is going to increase, we prefer to have A. Positive duration gap B. Negative maturity gap C. Positive repricing gap D. Positive duration gap and positive repricing gap E. None above 4. Value at Risk (VaR) A. VaR increases if volatility decreases B. VaR increases if maturity decreases C. VaR increase if confidence level (1-u) increases D. The lower the VaR, the more conservative E. None above
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