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You have a 5 - year investment holding horizon, would like to earn a 6 % annual compound return each year, and you have a
You have a year investment holding horizon, would like to earn a annual compound return each year, and you have a choice between two bonds. Whatever money $ you have to invest will be invested in one type of bonds or another.
Find the Bond Price, Duration and Modified Duration for each bond show your work and answer the questions below
Bond has a annual coupon rate, $ maturity value, n years, YTM pays a $ annual coupon at the end of each year and $ maturity payment at maturity Each bond will be held to maturity.
Bond is a zerocoupon bond with a $ maturity value, and n years; YTMpays no coupons; only a $ maturity payment at maturity
a Price Bond Price Bond
b Duration Bond Duration Bond
c Modified Duration Bond Modified Duration Bond
Be sure to show your work for the bond price and duration calculations for credit
d Which of the two bonds should you choose for your year investment horizon to duration match to ensure your desired annual compound return if you hold either bond to the end of years? Explain why. Assume the same default risk for each bond
e If interest rates go up by what will be the Change in the market value for each Bonds Price? Hint Change in Price Modified Duration x Change in Rate expressed as a fraction, ie
Change in Price for Bond Change in Price for Bond
f Which of the bonds has more price risk, and which has more reinvestment risk?
Explain why.
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