Consider a semi-annual bond that has a par value of 100, a 15-year maturity, a 5% coupon rate. Monthly interest rate is 0.412%. a) Calculate the annualized semi-annual compounding yield. b) What is the price of the bond (without calculation)? And explain why you can determine the price of the bond without calculation? c) Using answers from (b), calculate the modified duration of this bond.
Consider a semi-annual bond that has a par value of 100, a 15-year maturity, a 5% coupon rate. Monthly interest rate is 0.412%. a) Calculate the annualized semi-annual compounding yield. b) What is the price of the bond (without calculation)? And explain why you can determine the price of the bond without calculation? c) Using answers from (b), calculate the modified duration of this bond.
Chapter13: Long-term Liabilities
Section: Chapter Questions
Problem 5Q: What do you have to do to the interest rate and years of maturity if a bond pricing problem tells...
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Answer all the six parts of the question as per its requirements
![Question 5.
Consider a semi-annual bond that has a par value of 100, a 15-year maturity, a 5% coupon rate.
Monthly interest rate is 0.412%.
(a) Calculate the annualized semi-annual compounding yield.
(b) What is the price of the bond (without calculation)? And explain why you can determine the
price of the bond without calculation?
(c) Using answers from (b), calculate the modified duration of this bond.
(d) Using answers from (b) and (c), suppose that the bond's yield to maturity decreases to 3.5%.
How much will the bond price increase by applying the duration rule?
(e) Do you agree with the following statement, and explain why?
"If two bonds have the same duration, then the percentage change in price of the two bonds will
be the same for a given change in interest rates."
(f) Discuss the problems with the traditional bond pricing approach by using the yield to maturity.
(300 words Maximum)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F190fb750-b601-4db1-afae-acabac6c9754%2F5c85090e-73c7-4bbe-81d7-212ec9ae27f5%2Ftcu7s4b_processed.png&w=3840&q=75)
Transcribed Image Text:Question 5.
Consider a semi-annual bond that has a par value of 100, a 15-year maturity, a 5% coupon rate.
Monthly interest rate is 0.412%.
(a) Calculate the annualized semi-annual compounding yield.
(b) What is the price of the bond (without calculation)? And explain why you can determine the
price of the bond without calculation?
(c) Using answers from (b), calculate the modified duration of this bond.
(d) Using answers from (b) and (c), suppose that the bond's yield to maturity decreases to 3.5%.
How much will the bond price increase by applying the duration rule?
(e) Do you agree with the following statement, and explain why?
"If two bonds have the same duration, then the percentage change in price of the two bonds will
be the same for a given change in interest rates."
(f) Discuss the problems with the traditional bond pricing approach by using the yield to maturity.
(300 words Maximum)
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