A 30 year Treasury bond is paying an annual coupon of 4% is sold for a price reflecting a yield to maturity of 4%. Two years pass. In the first year, the interest rate decreased by 25 basis points. In the second year, the interest rate remained unchanged. Assuming a flat term structure and holding all other factors constant, the bond's price during this two-years period would have (a) Remained constant (b) Decreased first and then increased (c) Increased first and then decreased (d) Cannot be determined with the data given
A 30 year Treasury bond is paying an annual coupon of 4% is sold for a price reflecting a yield to maturity of 4%. Two years pass. In the first year, the interest rate decreased by 25 basis points. In the second year, the interest rate remained unchanged. Assuming a flat term structure and holding all other factors constant, the bond's price during this two-years period would have (a) Remained constant (b) Decreased first and then increased (c) Increased first and then decreased (d) Cannot be determined with the data given
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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Transcribed Image Text:23. A 30 year Treasury bond is paying an annual coupon of 4% is sold for a price reflecting a yield to
maturity of 4%. Two years pass. In the first year, the interest rate decreased by 25 basis points. In
the second year, the interest rate remained unchanged. Assuming a flat term structure and holding
all other factors constant, the bond's price during this two-years period would have
(a) Remained constant
(b) Decreased first and then increased
(c) Increased first and then decreased
(d) Cannot be determined with the data given
24. A manager wants to swap a bond for a bond with the same price but higher duration. Which of
the following bond characteristics would be associated with a higher duration?
I. A higher coupon rate
II. Less frequent coupon payments
III. A longer term to maturity
IV. A lower yield
(a) I, II, and III
(b) III and IV
(c) I and II
(d) II, III, and IV
25. An investor has a bond portfolio worth USD 20,000 with a duration of 8. How can the position be
hedged with a bond that has a duration of 10 years?
Note: By hedged, the question refers to attaining a zero-duration target.
(a) Short USD 20,000 of the bond with duration of ten
(b) Short USD 16,000 of the bond with duration of ten
(c) Long USD 20,000 of the bond with duration of ten
(d) Short USD 12,000 of the bond with duration of 10
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“Hi There, Thanks for posting the questions. As per our Q&A guidelines, must be answered only one question when multiple questions posted under single question. Hence, the solution for the first question is provided below. Please repost the remaining questions separately. One of our experts will help you on this.”
Annual Coupon rate is 4%
YTM is 4%
In first year yield decreases by 0.25%
In second year it remain constant.
To Find:
- Impact on price of bond in 2 years
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