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Under the following Term Structure of Interest Rate: TSRI 1 4.90% 2 5.70% 3 6.20% 4 6.30% 5 6.50% In the market there are the
Under the following Term Structure of Interest Rate: TSRI 1 4.90% 2 5.70% 3 6.20% 4 6.30% 5 6.50% In the market there are the following bonds: 1. II. Face value: 1,000 Euros Coupon: 8% (paid annually) Maturity: 1 year. Face value: 1,000 Euros Coupon: 8% (paid annually) Maturity: 2 years. Face value: 1,000 Euros - Coupon: 8% (paid annually) Maturity: 5 years. III. Required: A. Calculate their bond price. B. Calculate each bond yield, also called internal rate of return or IRR (Find out discount factor, annually compounded and continuous compounding for each bond). C. Calculate the yield of TSRI. Write down the equivalence to get it. D. Calculate Duration, Modified Duration and Convexity of the bonds. E. According to the Liquidity Preference Theory, which is the best option for a trader to invest during 5-years? Justify your answer: Invest today only in one bond "ii" (5 years to maturity) Or buy today bond i (1 year to maturity) and reinvest the cash flow at every expiration date during a total period of 5 years? F. Consider a fourth bond whose price is 1,000 euros and whose modified duration is four years. How would you price the bond if the yield curve fell 125 basis points? . Under the following Term Structure of Interest Rate: TSRI 1 4.90% 2 5.70% 3 6.20% 4 6.30% 5 6.50% In the market there are the following bonds: 1. II. Face value: 1,000 Euros Coupon: 8% (paid annually) Maturity: 1 year. Face value: 1,000 Euros Coupon: 8% (paid annually) Maturity: 2 years. Face value: 1,000 Euros - Coupon: 8% (paid annually) Maturity: 5 years. III. Required: A. Calculate their bond price. B. Calculate each bond yield, also called internal rate of return or IRR (Find out discount factor, annually compounded and continuous compounding for each bond). C. Calculate the yield of TSRI. Write down the equivalence to get it. D. Calculate Duration, Modified Duration and Convexity of the bonds. E. According to the Liquidity Preference Theory, which is the best option for a trader to invest during 5-years? Justify your answer: Invest today only in one bond "ii" (5 years to maturity) Or buy today bond i (1 year to maturity) and reinvest the cash flow at every expiration date during a total period of 5 years? F. Consider a fourth bond whose price is 1,000 euros and whose modified duration is four years. How would you price the bond if the yield curve fell 125 basis points
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