Consider an investment portfolio consisting of two zero-coupon bonds: a 4-year zero-coupon bond with maturity value 4,000 and a yield of 4% a 7-year zero-coupon bond with maturity value 7,000 and a yield of 7% What is the modified duration of this 2-bond portfolio? All of the interest rates in this problem are annual effective rates.) A) 5.31 B) 5.36 C) 5.46 D) 5.56 E) 5.91

Consider an investment portfolio consisting of two zero-coupon bonds: a 4-year zero-coupon bond with maturity value 4,000 and a yield of 4% a 7-year zero-coupon bond with maturity value 7,000 and a yield of 7% What is the modified duration of this 2-bond portfolio? All of the interest rates in this problem are annual effective rates.) A) 5.31 B) 5.36 C) 5.46 D) 5.56 E) 5.91

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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Suppose the current yield on a one-year, zero coupon bond is 3%, while the yield on a six-year, zero coupon bond is 7%. Neither bond has any risk of default. Suppose you plan to invest for one year. You will earn more over the year by investing in the six-year bond as long as its yield does not rise above what level? A. 60% B. 7.82% C. 10.38% D. 9.1%
Consider the following bonds: •Bond A: A 2-year zero-coupon bond with a face value of $100 and 6% YTM. •Bond B: A 2-year par-value bond with a face value of $100 and 6% coupon rate. *Bond C: A 2-year par-value bond with a face value of $100 and 7% coupon rate. Suppose the yield curve shifts upwards by one percent. Which bond among bonds A, B, and C will experience the largest percentage price change? Which will have the lowest percentage price change? O a. Bond A; Bond C O b. Bond A; Bond B O c. Bond B; Bond C O d. Bond C; Bond B
29. Consider two fixed coupon bonds with the same maturity 10Y and same face value F = 100. Bond 1 pays yearly coupons with coupon rate C₁ = 5% and bond 2 has coupon rate C₂ = 7%. Which of the two bonds has a larger duration? (a) Bond 1. (b) Bond 2. 30. Consider two exchange rates X/Y and Z/Y. (For example EUR/USD and JPY/USD.) They both follow perfectly correlated geometric Brownian motions with parameters (μ1,01) and (μ2, 02). Does the cross-exchange rate X/Z (for example EUR/JPY) also follows a geometric Brownian motion? (a) Yes (b) No
B.) The Hull-White model is considering the short rate movement follow the lognormal distribution. 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 1.0000 0.0000 0.0000 1.0000 A 10-year bond issued today at par with an A rating is assumed to bear a coupon rate of 7%. If a bond is issued today at par with a B rating and with a recovery percentage of 50%, what should be its coupon rate so that its expected return will also be 7%? Choose the closest answer A) 2.5% B) 5% C) 7.5% D) 9% E) 11%
10) Suppose a coupon bond with 10 years remaining to maturity is reported to have a duration equal to 6.7 years. Assuming a current interest rate of 9% and an estimated decrease in the interest rate to 8.8%, calculate the estimated percentage increase in the bond's price. Hint: Duration= a) 3.3% b) 2.7% c) 1.2% d) 0.6% %AP Ai/(1+io)
Suppose the interest rate on a 1-year T-bond is 2.60% and that on a 2-year T-bond is 4.50%. Assume that the pure expectations theory is NOT valid, and the MRP is zero for a 1-year T-bond but 0.30% for a 2-year bond. What is the equilibrium market forecast for 1-year rates 1 year from now? a. 4.7333% b. 5.1110% c. 5.2676% d. 5.5463% e. 5.8250%. Only typing answer Please explain step by step
5. To create a portfolio with a duration of 4 years, using a 5-year zero-coupon bond and a 3 year 8% annual coupon bond with a yield to maturity of 10%, one would have to invest % of the portfolio value in the zero-coupon bond. (Hint: First find duration of the coupon bond and use the fact that the duration of a bond portfolio is equal to the sum of duration of each bond x each bond's portfolio weight) A) 50 B) 55 C) 60 D) 65
1) Explain the concept of interest rate risk in bond investment 2) show a numerical example of it by calculating % changes in price for 1 year and 3-year annual coupon bonds. Assume coupon interest rate = 12%, Yield to Maturity = 6%, Face value= 100. Use 2% increase in YTM (i.e., 6% → 8%).
Assume the zero-coupon yields on default-free securities are as summarized in the following table: 3 years 4 years 5 years Maturity 1 year 2 years 7.00% 7.30% 6.20% 6.50% 6.70% Zero-Coupon Yields What is the maturity of a default-free security with annual coupon payments and a yield to maturity of 6.20%? Why? What is the maturity of a default-free security with annual coupon payments and a yield to maturity of 6.20%? (Select the best choice below.) O A. One year В. Тwo years C. Three years D. Four years E. Five years
9. Interest Rate Risk. Suppose that you are a fixed income portfolio manager at Bourbon Street Capital. You have the following bonds issued by Royal, Inc. and Chartres, LLC in your portfolio and you want to understand the risk profile of your portfolio. Given that both bonds pay semiannual coupons, answer the following questions. (Remember to convert your answer to units of full years.) Coupon Yield to maturity Maturity (years) Royal, Inc. Chartres, LLC. Bond A Bond B 9% 8% 5 $100.00 $104.055 8% 8% 2 Par $100.00 Price $100.00 (a) What is the DV01 (at current prices) for bonds A and B? (b) What are the Macaulay Durations (at current prices) for the two bonds? (c) What are the modified durations for the two bonds? (d) What is the convexity of the two bonds?
Suppose you want to figure out the relationship between duration and maturity, so you consider the following three T-Bonds. You compute a. The duration of a two-year Treasury bond with a 10 percent semiannual coupon selling at par b. The duration of a three-year Treasury bond with a 10 percent semiannual coupon selling at par c. The duration of a four-year Treasury bond with a 10 percent semiannual coupon selling at par
Duration and price sensitivity a) Calculate the duration and modified duration of a bond with a face of $1,000, a 6% coupon rate, and a 5% YTM with 1 payment per year and a maturity of 10 years, using the Excel DURATION and MDURATION formulas. b) Calculate the following: 1. What are the approximate percentage and dollar changes in price for a 1% change in interest rates using the duration approximation formula? 2. What are the actual percentage and dollar changes in price if interest rates increase by 1%?

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