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You are considering the purchase of the following annually coupon paying bonds. Bond Annual coupon Reaming maturity YTM Par value A 12% 3 years 10%
- You are considering the purchase of the following annually coupon paying bonds.
| Bond | Annual coupon | Reaming maturity | YTM | Par value |
| A | 12% | 3 years | 10% | %1000 |
| B | 0% | 3 years | 10% | $1000 |
- calculate the fair market price of the bond A.
- calculate the duration of bond A using the table in below.
| Time | Cash flow | PV of cash flow | weight |
|
| 1 |
|
|
|
|
| 2 |
|
|
|
|
| 3 |
|
|
|
|
|
|
|
|
|
|
- Suppose YTMs of bonds A and B fall 10% to 9%
- In what direction will the bond prices move? Why?
- Which will move more. A or B? WHY?
- Calculate the price change of bond A using the duration calculated in 2).
- An investor has a horizon date of 2.5 year
- Which bond has lower risk? why?
- Neglecting default and call risk, why the chosen bond is risky to the investor? If any, what type of risk? Why?
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Fiduciary Finance Investment Funds And The Crisis In Financial Markets
Authors: Martin Gold
1st Edition
1848448953, 9781848448957
