A 13 15-year maturity zero-coupon bond selling at a yield to maturity of 3% (effective annual yield) has convexity of 1595 and modified duration of 12 18 years A 40-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical modified duration-12 30 years-but considerably higher convexity of 272.9 Required: a. Suppose the yield to maturity on both bonds increases to 9% What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Actual loss Predicted loss Zero-Coupon Bond 11.41 % 11.38 % Coupon Bond 11:15 % 10.93% Suppose the yield to maturity on both bonds decreases to 7% What will be the actual percentage capital gain on each bond? What percentage capital gain would be predicted by the duration-with-convexity rule? Do not ro

A 13 15-year maturity zero-coupon bond selling at a yield to maturity of 3% (effective annual yield) has convexity of 1595 and modified duration of 12 18 years A 40-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical modified duration-12 30 years-but considerably higher convexity of 272.9 Required: a. Suppose the yield to maturity on both bonds increases to 9% What will be the actual percentage capital loss on each bond? What percentage capital loss would be predicted by the duration-with-convexity rule? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Actual loss Predicted loss Zero-Coupon Bond 11.41 % 11.38 % Coupon Bond 11:15 % 10.93% Suppose the yield to maturity on both bonds decreases to 7% What will be the actual percentage capital gain on each bond? What percentage capital gain would be predicted by the duration-with-convexity rule? Do not ro

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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Prices of zero-coupon bonds reveal the following pattern of forward rates: Year 1 2 3 Forward Rate 8% 11 13 In addition to the zero-coupon bond, investors also may purchase a 3-year bond making annual payments of $55 with par value $1,000. Required: a. What is the price of the coupon bond? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. What is the yield to maturity of the coupon bond? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. c. Under the expectations hypothesis, what is the expected realized compound yield of the coupon bond? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. d. If you forecast that the yield curve in 1 year will be flat at 8.0%, what is your forecast for the expected rate of return on the coupon bond for the 1-year holding period? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Answer is not complete. $ 952.95 x a.…
5) Bond A is a 10-year, 8 percent annual coupon bond with a $1,000 par value. Bond B is a 10-year, 6 percent annual coupon bond with a $1,000 par value. Both bonds currently have a yield to maturity of 4 percent. Which of the following statements is correct if the market yield decreases to 2 percent? 1. Bond A will increase in value by a greater percentage than Bond B. 2. Bond B will increase in value by a greater percentage than Bond A. 3. Both bonds would decrease in value by 8.27 percent. 4. Bond B will decrease in value by a greater percentage than Bond A. 5. Both bonds will increase in value by 8.27 percent.
4.
Prices of zero-coupon bonds reveal the following pattern of forward rates: Year 1 2 3 Forward Rate 4% 5 6 In addition to the zero-coupon bond, investors also may purchase a 3-year bond making annual payments of $40 with par value $1,000. Required: a. What is the price of the coupon bond? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. What is the yield to maturity of the coupon bond? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. c. Under the expectations hypothesis, what is the expected realized compound yield of the coupon bond? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. d. If you forecast that the yield curve in 1 year will be flat at 5.5%, what is your forecast for the expected rate of return on the coupon bond for the 1-year holding period? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. a. Price b. Yield to maturity c.…
Vijay
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Part 1 Consider a five-year, default-free bond with annual coupons of 5% and a face value of $1,000 and assume zero-coupon yields on default-free securities are as summarized in the following table: Maturity 1 year 2 years 3 years 4 years 5 years Zero-Coupon Yields 4.00% 4.30% 4.50% 4.70% 4.80% a. What is the yield to maturity on this bond? b. If the yield to maturity on this bond increased to 5.20%, what would the new price be?
Maturity (years) Price 2.83% 5.79% The above table shows the price per $100-face value bond of several risk-free, zero-coupon bonds. What is the yield to maturity of the four-year, zero- coupon, risk-free bond shown? 2.85% 12.07% 1 $97.25 2.89% 3 2 $94.53 $91.83 5 4 $89.23 $87.53
R2

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