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UDIIS O 31. Two bonds are available for purchase in the financial mar- kets. The first bond is a two-year, $1,000 bond that pays an
UDIIS O 31. Two bonds are available for purchase in the financial mar- kets. The first bond is a two-year, $1,000 bond that pays an annual coupon of 10 percent. The second bond is a two- year, $1,000, zero-coupon bond. (LG 3-7) a. What is the duration of the coupon bond if the current yield to maturity is 8 percent? 10 percent? 12 percent? b. How does the change in the current yield to maturity affect the duration of this coupon bond? c. Calculate the duration of the zero-coupon bond with a yield to maturity of 8 percent, 10 percent, and 12 percent. d. How does the change in the yield to maturity affect the duration of the zero-coupon bond? e. Why does the change in the yield to maturity affect the coupon bond differently than it affects the zero-coupon bond? 1407 MLK Bank has an asset portfolio that consists of $100 mil- lion of 30-year, 8 percent annual coupon, $1,000 bonds that sell at par. (LG 3-4, LG 3-6) a. What will be the bonds' new prices if market yields change immediately by + 0.10 percent? What will be the new prices if market yields change immediately by +2.00 percent? b. The duration of these bonds is 12.1608 years. What are the predicted bond prices in each of the four cases using the duration rule? What is the amount of error between the duration prediction and the actual market values? Un
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