Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The following five (5) questions are based on the following information. You owe a mobster in Chicago money in 5 years. You want to earn

The following five (5) questions are based on the following information.

You owe a mobster in Chicago money in 5 years. You want to earn a little bit on money you set aside to pay this liability. However, you do not know if interest rates will rise or fall. You have two bonds to choose from with semi-annual coupon payments:

Bond A Bond B
Time to maturity (years) 5 6
Annual yield to maturity 4.00% 4.00%
Annual coupon payment 40.00 65.94
Current price -1000 -1000
Face value 1000 826.02

So we start with two bonds of equal price ($1000) and annual yield to maturity (4.00%).

1. What is the Macaulay duration (in years) for Bond A?

2. What is the Macaulay duration (in years) for Bond B?

3. Which bond should you choose to immunize your bond holdings from interest rate fluctuations?

4. Assume annual yield to maturity drops from 4.00% to 3.00%. What is the total ending wealth of Bond B?

5. Assume annual yield to maturity drops from 4.00% to 3.00%. What is the total ending wealth of Bond A?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Contemporary Financial Management

Authors: James R Mcguigan, R Charles Moyer, William J Kretlow

10th Edition

978-0324289114, 0324289111

More Books

Students also viewed these Finance questions