(Bond selection) Consider the four bonds having annual payments as shown in Table 39 They are traded to produce a 15% yield (a) Determine the price of each bond (b) Determine the duration of each bond (not the modified duration) (c) Which bond is most sensitive to a change in yield? (d) Suppose you owe $2,000 at the end of 2 years Concern about interest rate risk sug- gests that a portfolio consisting of the bonds and the obligation should be immunized If VA, VB, VC, and V are the total values of bonds purchased of types A, B, C, and D, respectively, what are the necessary constraints to implement the immunization? [Hint There are two equations (Do not solve )]
(Bond selection) Consider the four bonds having annual payments as shown in Table 39 They are traded to produce a 15% yield (a) Determine the price of each bond (b) Determine the duration of each bond (not the modified duration) (c) Which bond is most sensitive to a change in yield? (d) Suppose you owe $2,000 at the end of 2 years Concern about interest rate risk sug- gests that a portfolio consisting of the bonds and the obligation should be immunized If VA, VB, VC, and V are the total values of bonds purchased of types A, B, C, and D, respectively, what are the necessary constraints to implement the immunization? [Hint There are two equations (Do not solve )]
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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Question
![12. (Bond selection) Consider the four bonds having annual payments as shown in Table 39
They are traded to produce a 15% yield
(a) Determine the price of each bond
(b) Determine the duration of each bond (not the modified duration)
(c) Which bond is most sensitive to a change in yield?
(d) Suppose you owe $2,000 at the end of 2 years Concern about interest rate risk sug-
gests that a portfolio consisting of the bonds and the obligation should be immunized
If VA, VB, VC, and V₁ are the total values of bonds purchased of types A, B, C, and
D, respectively, what are the necessary constraints to implement the immunization?
[Hint There are two equations (Do not solve)]
TABLE 3.9
End of year payments
Year I
Year 2
Year 3
Bond A
Bond B
Bond C
50
50
Bond D
100
0
0 + 1000
100
0
0
100 + 1000 50+ 1000 0 + 1000 0](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F840f00f1-e813-4590-88b6-e36672d870f9%2F46835c47-980a-49cb-b387-5849dab67353%2Fspr13bv_processed.png&w=3840&q=75)
Transcribed Image Text:12. (Bond selection) Consider the four bonds having annual payments as shown in Table 39
They are traded to produce a 15% yield
(a) Determine the price of each bond
(b) Determine the duration of each bond (not the modified duration)
(c) Which bond is most sensitive to a change in yield?
(d) Suppose you owe $2,000 at the end of 2 years Concern about interest rate risk sug-
gests that a portfolio consisting of the bonds and the obligation should be immunized
If VA, VB, VC, and V₁ are the total values of bonds purchased of types A, B, C, and
D, respectively, what are the necessary constraints to implement the immunization?
[Hint There are two equations (Do not solve)]
TABLE 3.9
End of year payments
Year I
Year 2
Year 3
Bond A
Bond B
Bond C
50
50
Bond D
100
0
0 + 1000
100
0
0
100 + 1000 50+ 1000 0 + 1000 0
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