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 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? Page 213 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. Bond B PV(CF) Weight Cash Flow 17 1 Q7 Interest rate risk of the bond 2 (11 pts) 3 INPUT DATA 4 Bond B 5 Years to Maturity 6 Coupon rate 7 Annual Payment 8 Par value 9 Frequency 10 Yield to Maturity 121) Calculate the bond price and duration (heading row bow will be given one 13 Bond A 14 Time Cash Flow PV(CF) Weight Time Weight 15 1 16 2 3 18 19 20 21 22 23 9 24 10 25 11 26 12 22 13 28 29 15 30 Price A. Duration 32 Modified Duration: 34 Type of Bonds 35 362) Current yield Bond AS 37 38 3) Bond price at times Bond AS 39 40 Capital gain or loss yle Bond A Page 1 Bord B Duration B Modified Duration Type of Bond Bond B I DITO ODIO Bond B Bond B ** 3 4 5 6 7 8 9 10 Cash Flow Bond B PVICF) Weloht Time Weight Cash Flow PV(CF) Bond C Weight Time Weight 12 m) 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 1 Page Bond B Duration Be Bond C1 Duration Cu Modified Durations Modified Durations Type of Bond Type of Bordo 32 >>> 34 35 36 37 38 39 40 Bond B 0001 Bond Co Bond B Bond Co Bond B 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 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? Page 213 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. Bond B PV(CF) Weight Cash Flow 17 1 Q7 Interest rate risk of the bond 2 (11 pts) 3 INPUT DATA 4 Bond B 5 Years to Maturity 6 Coupon rate 7 Annual Payment 8 Par value 9 Frequency 10 Yield to Maturity 121) Calculate the bond price and duration (heading row bow will be given one 13 Bond A 14 Time Cash Flow PV(CF) Weight Time Weight 15 1 16 2 3 18 19 20 21 22 23 9 24 10 25 11 26 12 22 13 28 29 15 30 Price A. Duration 32 Modified Duration: 34 Type of Bonds 35 362) Current yield Bond AS 37 38 3) Bond price at times Bond AS 39 40 Capital gain or loss yle Bond A Page 1 Bord B Duration B Modified Duration Type of Bond Bond B I DITO ODIO Bond B Bond B ** 3 4 5 6 7 8 9 10 Cash Flow Bond B PVICF) Weloht Time Weight Cash Flow PV(CF) Bond C Weight Time Weight 12 m) 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 1 Page Bond B Duration Be Bond C1 Duration Cu Modified Durations Modified Durations Type of Bond Type of Bordo 32 >>> 34 35 36 37 38 39 40 Bond B 0001 Bond Co Bond B Bond Co Bond B
