A corporation buys a 10-year semi-annual coupon bond with 5% coupon rate. The price, duration, and convexity of the bond is $103.58, 8.03, and 73.87, respectively. If the corporation is worried about the losses that its portfolio may suffer from an upward shift in the term structure of interest rates, how can this corporation make a duration and convexity hedging strategy using 2-year zero coupon bond and 5-year zero coupon bond? Assume that the price of the 2-year zero coupon bond is $91.39 and that the price of the 5-year zero coupon bond is $79.85.

A corporation buys a 10-year semi-annual coupon bond with 5% coupon rate. The price, duration, and convexity of the bond is $103.58, 8.03, and 73.87, respectively. If the corporation is worried about the losses that its portfolio may suffer from an upward shift in the term structure of interest rates, how can this corporation make a duration and convexity hedging strategy using 2-year zero coupon bond and 5-year zero coupon bond? Assume that the price of the 2-year zero coupon bond is $91.39 and that the price of the 5-year zero coupon bond is $79.85.

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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A 20-year bond has a coupon rate of 8 percent, and another bond of the same maturity has a coupon rate of 15 percent. If the bonds are alike in all other respects, which will have the greater relative market price decline if interest rates increase sharply? Why?
Suppose that the observed spread between the yield on a 4-year zero-coupon riskless bond and the yield on a 4-year zero-coupon bond issued by a corporation is 1.35%. By how much (as a percentage) would the Black-Scholes-Merton model overstate the value of a 4-year European option sold by the corporation?
The Risky-Bet firm has promised payments to its bondholders that total £100. The company believes that there is an 85% chance that the cash flow will be sufficient to meet these claims. However, there is a 15% chance that the cash flow will fall short, in which case total earnings are expected to be £65. If that happens, then the firm will go bankrupt. If the bond sells in the market for £84, what is (i) an estimate of the bankruptcy costs for Risky-bet and (ii) the impact of bankruptcy costs on the price of the bond? a. (i) £14.35 and (ii) £-1.68 a. (i) £14.35 and (ii) £-2.14 a. (i) £15.67 and (ii) £-1.68 a. (i) £15.67 and (ii) £-2.14 e. None of the above
Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
Consider a one-year, 5-percent coupon bond with a face value of $100 issued by a Seabass Corporation. There is a 10 percent probability that it will default on its bonds and the risk-free interest rate (i) is 3.0%. If an investor were willing to pay $917.48 for the bond, is that investor risk-neutral or risk averse
If the estimated return on a corporate bond is 8%, while the return on US Treasury bond is 3%. How much is the risk premium in this case? Hint: The risk premium is the compensation investors required to hold the risky asset. It equals the expected return on the risky investment minus the risk-free return.
Please answer fast I give you upvote.
9. Read the following sentences and answer the questions. Company A plans to carry out $1 million in 1.5 years. Since this company is exposed to changes in the won-dollar exchange rate, it is trying to calculate the risk by applying the variance covariance method. The dollar-free coupons traded in the market have only one- year maturity and two-year maturity, and the yield of each bond is 5% and 6%. The annual volatility of the two bonds was 0.5% and 0.7%, respectively, and the correlation was estimated to be 0.80. 1) When 1 million dollars are mapped to two bond periods, find the present value of each 2) If a normal distribution is assumed under the 95% confidence level, find the non-variance VaRturncliversified Va) of the above position. 3) If a normal distribution is assumed under the 95% confidence level, find the diversified VaR (VaR) of the above position.
The rise and fall of a bond's price has a direct inverse relationship to its yield to maturity, or interest rate. As prices go up, the yield declines and vice versa. For example, a $1,000 bond might carry a stated annual yield, known as the coupon of 8%, meaning that it pays $80 a year to the bondholder. If that bond was bought for $870, the actual yield to maturity would be 9.2% ($80 annual interest on $870 of principal). Do you agree with this analysis? Briefly explain.
Suppose a company has a £1 million obligation in 10 years’ time. Assume the yield curve is flat at 9%. The following annual coupon bonds (in the table attached below) are available to construct an immunised portfolio to meet this obligation. Using a discount factor of 9%, calculate the present value of the liability, and explain why bonds B and C cannot be used to construct the immunised portfolio.
Adidas issued a zero-coupon bond with a five-year maturity and a $100 face value. You believe there is a 20% chance that they will default, and if they do default, you expect to receive only 55 cents per dollar of what you are promised. If you require a 6% expected return on this investment: a. what will be the price of these bonds, and 2. what will be the yield to maturity on these bonds? Note: Assume annual compounding. Question content area bottom Part 1 a. The price of these bonds is $enter your response here. (Round to the nearest cent.) b. The yield to maturity on these bonds is enter your response here%. (Round to two decimal places.)
The Isabelle Corporation rents prom dresses in its stores across the southern United States. It has just issued a five-year, zero-coupon corporate bond at a price of $62 (assume a $100 face value bond). You have purchased this bond and intend to hold it until maturity. a. What is the yield to maturity of the bond? b. What is the expected return on your investment (expressed as an EAR) if there is no chance of default? c. What is the expected return (expressed as an EAR) if there is a 100% probability of default and you will recover 90% of the face value? d. What is the expected return (expressed as an EAR) if the probability of default is 50% in good times, the likelihood of default is higher in bad times than good times, and, in the case of default, you will recover 90% of the face value? e. For parts (b) through (d), what can you say about the five-year, risk-free interest rate in each case? Note: Assume annual compounding. C a. What is the yield to maturity of the bond? The yield to…

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