5. To create a portfolio with a duration of 4 years, using a 5-year zero-coupon bond and a 3 year 8% annual coupon bond with a yield to maturity of 10%, one would have to invest % of the portfolio value in the zero-coupon bond. (Hint: First find duration of the coupon bond and use the fact that the duration of a bond portfolio is equal to the sum of duration of each bond x each bond's portfolio weight) A) 50 B) 55 C) 60 D) 65

5. To create a portfolio with a duration of 4 years, using a 5-year zero-coupon bond and a 3 year 8% annual coupon bond with a yield to maturity of 10%, one would have to invest % of the portfolio value in the zero-coupon bond. (Hint: First find duration of the coupon bond and use the fact that the duration of a bond portfolio is equal to the sum of duration of each bond x each bond's portfolio weight) A) 50 B) 55 C) 60 D) 65

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Suppose you own a 3-year, 7% annual coupon bond with a maturity value of $1,000 with a yield to maturity of 10%. You want to find the duration-matched short position in a 3-year, 8% annual coupon bond with a maturity value of S1,000 and yielding 5%. How many units of the second bond do you need to short?
Consider a two-year coupon bond issued by an airline with Face Value of $1,000, Coupon Rate of 3%, Annual Default Probability of 5%, & Risk-Free Interest Rate of 3% per year. Use a binomial tree to value the bond assuming no recovery. Show your work & write your answer in dollars and cents below. The value (price, expected present value, etc.) of the bond is _______.
D2) You are asked to invest $30 million in a bond portfolio consisting of only two bonds. Bond A has a yield of 6% and is a 5 year coupon bond a duration of 4.36 years, and bond B has a yield 7% and is a 7 year coupon bond duration of 6.50 years. The portfolio is to have an investment horizon of 5 years. How much of each bond issue would you have to buy to immunize the portfolio? A. Invest in 70 percent bond A and 30 percent bond B. B. Invest in 60 percent bond A and 40 percent bond B. C. Invest in 30 percent bond A and 70 percent bond B D. Invest in 40 percent bond A and 60 percent bond B
Give typing answer with explanation and conclusion Consider a 6% semiannual coupon payment bond with five years to maturity currently priced at par (YTM = 6.00%). Using a 30 bp increase and 30 bp decrease in yield to maturity, calculate the approximate convexity for this bond.
Unlike the coupon interest rate, which is fixed, a bond's yield varies from day to day depending on market conditions. To be most useful, it should give us an estimate of the rate of return an investor would earn if that investor purchased the bond today and held it for its remaining life. There are three different yield calculations: Current yield, yield to maturity, and yield to call. A bond's current yield is calculated as the annual interest payment divided by the current price. Unlike the yield to maturity or the yield to call, it does not represent the actual return that investors should expect because it does not account for the capital gain or loss that will be realized if the bond is held until it matures or is called. This yield was popular before calculators and computers came along because it was easy to calculate; however, because it can be misleading, the yield to maturity and yield to call are more relevant. The yield to maturity (YTM) is the rate of return earned on a…
Consider the zero coupon Treasury bond yield curve. Suppose a 1 year bond has a yield of 2.13%. The yield curve slopes downwards between maturities of 1 year and 3 years, and then slopes upwards. Which of the following must be true? Group of answer choices A) The yield of a zero coupon bond with maturity 5 years is higher than 2.13%. B) A 1 year positive coupon bond must have a lower price than the zero coupon bond with the same maturity. C) Bond purchasers believe the Fed will decrease rates in the short run, and then increase them in the long run. D) The economy will be in a recession within 2 years. E) C and D.
Suppose an investor has a 5-year investment horizon. He purchased an 8-year paying an 8% annual coupon rate while the bond's initial annual yield to maturity is 6%. The bond makes coupon payments semi-annually. The investor expects that he can reinvest the coupon at an annual interest rate of 7%. At the beginning of year 6, he expects the then yield to maturity to be 7%. What is the total return for this bond?
7. Given the two bonds below, answer the following questions. Bond Bond A Coupon Rate B 5% Par/Face/Princ $1000 Years to Maturity 2 5% $1000 a. If the Yield to maturity of the two bonds is 5%, what is the price of both bonds. b. Find the Modified Duration of both bonds. c. Find the Modified Convexity of both bonds. d. Estimate the price of bond B using the Tayor Series Expansion if interest rates rise to 6% for the Yield to Maturity. 3
A short question 4) You are managing a portfolio of $1 million. Your target duration is 10 years, and you can choose from two bonds: a zero-coupon bond with maturity of 5 years, and a perpetuity*, each currently yielding 5%. a. How much of each bond will you hold in your portfolio? b. How will these ratios change next year if target duration is now 9 years? *: Perpetuity: a specal case of annuity, where n-> Inf, thus the maturity of the instrument is perpetual.
A n-year annual coupons bond with coupon rate r per year. The yield rate is 0.10. Calculate the Macaulay duration of the bond for all four possible combinations of parameters: • n = 10 or 30 • r = 0.05 or 0.15
Question A .Consider a 2-year, risk-free bond with a coupon rate of 6% (annual coupons) and a face value of $1,000. If the yield on the above bond is 6%: a. What is the Macaulay duration of this bond? b. If the yield increases to 7% immediately, what does the duration approximation predict will be the percentage change in the bond price? c. If the yield decreases to 5% instead, what is the approximate percentage change in the bond price implied by the bond’s duration? d. After receiving the first coupon payment in year 1, the yield increases to 7% and you decide to sell the bond. What is your annualized HPR? Full explain this question and text typing work only We should answer our question within 2 hours takes more time then we will reduce Rating Dont ignore this line
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