Q7 (11 points): Interest rate risk of bonds Tom is a recent retiree who is interested in investing some of his savings in corporate bonds. His financial planner has suggested the following bonds. Coupon rate Maturity (Yrs) Payment frequency Face value Yield to maturity Bond A 7% 15 1 $1,000 10% Bond B 10% 15 1 $1,000 10% Bond C 12% 15 1 $1.000 10% 1) (3 points) Calculate the price, Macaulay duration, and modified duration of each of the three bonds, and determine the type of each bond (use the drop-down list). 2) (2 points) Calculate the current yield for each bonds. 3) (2 points) If the yield to maturity stays 10%, what will be the price of each bond one year from now? 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) (2 points) Determine the percentage changes in the bond price to a 2.5 basis-point (0.025%) increase in the yield based on only duration. 5) (2 points) Based on results from (4), which bond reacts the most to the interest rate fluctuation (use the drop-down list)? Verify this result with Property (V) of interest rate risk on slide page 31. 10 Mauty 12 Cache bond price and durwin 13 14 Te 15 + 16 Bond A PVC Bond PICH We Bond Cash Casio 10 11 12 13 14 15 Page 1 Page 2 30 POL bond Du wion GL Duwen Duration Modified Type Bonde Type of bone Sordo 14 Type of Bond 33 352) Current yuld Bond All 22 38 ) fond price Bond A. 35 40 Capital gas y Bond A Bordo Bond Band Bond 42 Holding period return Bond All 444) Determine percentage changes on price to 25. Nayed based on and duration 45 1.0 - D 48 S) Which bond reach the most to the struction 49