Question
Suppose there are 2 bonds with the following characteristics. There is a 2-year treasury bond with a face value of $1000, a 15% coupon rate,
Suppose there are 2 bonds with the following characteristics. There is a 2-year treasury bond with a face value of $1000, a 15% coupon rate, and the yield to maturity is 8%. There is also a 3- year treasury bond with $1000 face value, a 5% coupon rate, and the yield to maturity is 8%.
a)Calculate the current or fair price of each bond rightnow.
b)Calculate the duration of each bond rightnow.
c)If interest rates in the economy were to rise from 1% to 3%, how much would we expect the price of each bond to change by? Provide acalculation.
d)Suppose Roberta purchased the 3-year bond at the price calculated in part a). Now one year passes and Roberta sells the bond. Assume the yield to maturity is still 8%, what would be Roberta's rate of return?
e)Instead suppose Roberta kept the 3-year bond all the way until it matured (expired). What would be an estimate of her rate ofreturn?
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