Please solve and show the steps as to how you obtained the answer.

1 You have a portfolio made up of equal amounts of two different types of bonds:

2-year, 12% annual coupon bonds, with a duration of 1.6 years

20-year, 2.4% annual coupon bonds, with a duration of 18.3 years.

After doing a lot of economic analysis, you are sure interest rates will rise in the following year by at least 200 basis point.

Will you:

a) sell the 2-year bonds and buy more 20-year bonds?

b) sell the 20-year bonds and buy more 2-year bonds?

Justify your strategy

2 A bond starts the year at a price of $895.35.

At the end of the year, the bond price is $843.45.

During the year, the bond paid two coupons of $34.00 each.

What rate of return did the bond earn during the year?

3 General Retail, Inc. has issued bonds that are currently trading at an YTM of 5.5%, and are rated as BBB by Standard & Poor's. However, most of their stores are located in malls and thier sales results are decling.

After analyzing the company, you are certain that the bonds will be downgraded below investment grade in the next year, and will probably fall to BB or even B.

If you are right, will the bonds YTM go up, or down? Why?

4 General Industries, Inc. has just issued a bond with the following terms:

Face value = $1,000

Years to maturity = 15

Coupon rate = 6.4%

Coupons are paid every six months.

If the yield to maturity is 6.4%, with is the current value of this bond?

5 General Industries issued a bond one year ago. When issued, the bond had 15 years to maturity, and the YTM was 6.4%. Today, the YTM has gone down to 5.3%.

What is the value of the bond today?

Face value = $1,000

Years to maturity = ?

Coupon rate = 6.4%

Coupons are paid every six months.

6 Ventures owns 10,000 convertible bonds of T Corporation.

The terms of the convertible bonds are:

Face value = $1,000

Coupon rate = 7.5%

Maturity = 10 years

Coupons are paid every six months.

The Yield to Maturity is 8.0%

Each bond can be converted in 10 shares of stock of T Corporation The T Corporation shares are currently trading at $87.45 per share.

Should Ventures convert its bonds to stock?

7 Robert owns a portfolio of 150 zero coupon bonds. The terms of the bond are:

Face value = $1,000

Coupon rate = 0

Maturity = 20 years

The Yield to Maturity = 4.21 %

What is his portfolio worth?

8 In 1797, Great Britain sold a type of bond called a "consul".The bonds paid a $50 annual coupon, once per year. The unique feature of the bonds is that they had no maturity date - they pay their coupon forever.

If the current YTM on these bonds is 4.5%, what are these bonds worth today? Hint: Perpetuity

9 A bond has the following terms:

Face value = $1,000

Years to maturity = 12

Coupon rate = 6.4%

Coupons are paid every six months.

The YTM of the bond is 8.0%

What is the bonds duration?

10 You are a portfolio manager for M&D bank, and you manage a portfolio of bonds as follows:

Number of Bonds = 534,644

Portfolio Value = $446,721,987

Portfolio Average Maturity = 5.94 years

Portfolio Average Coupon = 4.45%

Portfolio Average Rating = AA

Portfolio Average Duration = 5.21 years

If interest rates rise by 1.5% (150 bps), how much will the value of the portfolio fall by?

(This is called interest rate risk)

11 Investors who are worried about inflation reducing the income they receive from bonds will often invest in treasury Inflation Protected Security (TIPS) bonds.

You are analyzing a TIPS bond that has the following terms:

Face value = $1,000

Years to maturity = 16

Coupon rate = 4.0%

Coupons are paid every six months.

The YTM of the bond is 8.0%

If inflation next year is 5.0% what will happen to the bond's Face Value? The coupon rate? the amount of each coupon?

12 A bond has the following terms:

Face value = $1,000

Years to maturity = 8

Coupon rate = 6.0%

Coupons are paid every six months.

The YTM of the bond is 8.0%

The bonds duration is 6.1 years.

If interest rates go up by 50 basis points, by what percentage would you expect the price of the bond to change?

13 Discuss whether the following statement is true:

"Becuase lenders have more risk lending money to someone for a longperiod of time, as compared to lending for a short period of time, long term interest rates are always higher than short term interest rates. As a result, the yield curve is always sloping upwards"

14 You look up the prices of US Treasury securities and find the following yields for different maturities:

1-year 3.0%

5-yr 2.5%

10-year 2.0%

20-yr 1.5%

With this information, describe what the current shape of the yield curve.

What does this tell you about the future direction of the economy?

15 A bond has the following terms:

Face value = $1,000

Years to maturity = 8

Coupon rate = 6.0%

Coupons are paid every six months.

The bond has a value today of $987.90.

What is the bonds Yield to Maturity?