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Problem 5: Bond Price Volatility (14 points) Consider the following four bonds: i. 5 years to maturity, 0% coupon ii. 20 years to maturity, 0%
Problem 5: Bond Price Volatility (14 points) Consider the following four bonds: i. 5 years to maturity, 0% coupon ii. 20 years to maturity, 0% coupon iii. 5 years to maturity, 5% coupon iv. 20 years to maturity, 5% coupon A. Assuming the term structure is flat at 5%, compute the price of each bond i. to iv. [2 points) B. What is the current yield for each bond from Part A? [2 points] C. Compute the new price and the percentage price change for each bond if the term structure instantaneously shifts from 5% to 5.5%. [2 points) D. Compute the new price and the percentage price change for each bond if the term structure instantaneously shifts from 5% to 4.5%. [2 points] E. How does the bond coupon rate relate to the magnitude of the percentage price change in C. and D.? [2 points) F. How does the term-to-maturity relate to the magnitude of the percentage price change in C. and D.? [2 points) G. Are the magnitudes of the percentage price changes in C. and D. different for each bond? If so, what contributed to that difference? [2 points) Problem 5: Bond Price Volatility (14 points) Consider the following four bonds: i. 5 years to maturity, 0% coupon ii. 20 years to maturity, 0% coupon iii. 5 years to maturity, 5% coupon iv. 20 years to maturity, 5% coupon A. Assuming the term structure is flat at 5%, compute the price of each bond i. to iv. [2 points) B. What is the current yield for each bond from Part A? [2 points] C. Compute the new price and the percentage price change for each bond if the term structure instantaneously shifts from 5% to 5.5%. [2 points) D. Compute the new price and the percentage price change for each bond if the term structure instantaneously shifts from 5% to 4.5%. [2 points] E. How does the bond coupon rate relate to the magnitude of the percentage price change in C. and D.? [2 points) F. How does the term-to-maturity relate to the magnitude of the percentage price change in C. and D.? [2 points) G. Are the magnitudes of the percentage price changes in C. and D. different for each bond? If so, what contributed to that difference? [2 points)
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