Q3 (35 points): Bond Portfolio Tim is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds. Bond A Bond B Bond C Coupon rate 7% 10% 12% Maturity (Yrs) 15 15 15 Payment frequency 1 1 1 Redemption value $ 1,000 $ 1,000 $ 1,000 Yield to Maturity 10% 10% 10% 1. Calculate the price, Macaulay duration, modified duration, and convexity of each of the three bonds, and determine the type of each bond (use the Drop down list). You may verify your answer using the excel function, but there is no need to report. 2. Calculate the current yield for each bonds. 3. If the yield to maturity stays at 10%, what will be the price of each bond 1 year from now (you may use the PRICE function)? What is the expected capital gains/loss yield for each bond? What is the expected holding period return over one year for each bond? 4. Determine the relationship among coupon rate, YTM, and current yield for Bond A and Bond C (use the Drop down list). 5. Determine the percentage changes in the bond price to a 25 basis-point (i.e. 0.25%) increase in the yield based on only duration. Which bond reacts the most to the interest rate fluctuation (use the Drop down list)? the Drop down list)? 6. Determine the percentage changes in the bond price to 150 basis points (i.e. 1.50%) decrease in yield based on duration and convexity? 7. Suppose investor considers to hold one 6% yield zero coupon bond with 6 year maturity and with $1,000 par value in addition to each of the three bonds. Calculate the portfolio duration. (1) Calculate the bond price, duration, and convexity. Time Cash Flow 1 2 3 4 PV(CF) WeightD Bond A Time*WeightD (t+t) Weightc (t+t2)*Weight 6 7 9 8663 10 Page 1 11 12 13 14 15 345 Price A= Type of Bond= Duration A =| Convexity A= Modified Duration A=| (2) Current yield Bond A= (3) Bond price at time=1 Bond A= (Using PRICE function) Capital gain/loss yield Bond A= Holding period return (over a year) Bond A= (4) Determine the relation among coupon rate, YTM, and current yield for each bond. Bond A: Largest Middle (5) Determine percentage changes in bond price to 25 basis points increase in vield based on bond's duration Smallest Page 3 A: Largest Middle (5) Determine percentage changes in bond price to 25 basis points increase in yield based on bond's duration. Which bond reacts the most to the interest rate fluctuation? Page 2 (6) Determine the percentage changes in bond price to 150 basis points decrease in yield based on bond's duration and convexity. = Smallest | | Page 4 P (7) Suppose an investor considers to hold one 6% yield zero coupon bond with 6 year maturity and with $1000 par value in addition to each of the three bonds. Calculate the portfolio duration Market price of zero-coupon bond=| Portfolio duration= Duration of zero-coupon bond= | | | | Market price of zero-coupon bond: Portfolio duration: