Consider four different bonds all having the same yield-to-maturity. Bond A is a consol that pays $50 every period forever and is currently priced at $714.29. Bond B, C and D have the same par value of $1,000. However, they differ in their maturity and coupon rate. Bond B and C have a maturity of 5 years, while bond D has a maturity of 10 years. Also, bond B and D have a coupon rate of 6%, while bond C has a coupon rate of 8%. [Hint: Coupons are paid annually to faciliate the calculations. Hence, coupon rates are also given annually. You may want to resort to the annuity formula to make your life easier.] a). Suppose the yield-to-maturity increases by 1%. Calculate the price changes on the individual bonds based on the two duration measures and based directly on the pricing formula. Compare your answers. b). Suppose the yield-to-maturity decreases by 1%. Calculate the price changes on the individual bonds based on the two duration measures and based directly on the pricing formula. Compare your answers.
Consider four different bonds all having the same yield-to-maturity. Bond A is a consol that pays $50 every period forever and is currently priced at $714.29. Bond B, C and D have the same par value of $1,000. However, they differ in their maturity and coupon rate. Bond B and C have a maturity of 5 years, while bond D has a maturity of 10
years. Also, bond B and D have a coupon rate of 6%, while bond C has a coupon rate of 8%. [Hint: Coupons are paid annually to faciliate the calculations. Hence, coupon rates are also given annually. You may want to resort to the
a). Suppose the yield-to-maturity increases by 1%. Calculate the price changes on the individual bonds based on the two duration measures and based directly on the pricing formula. Compare your answers.
b). Suppose the yield-to-maturity decreases by 1%. Calculate the price changes on the individual bonds based on the two duration measures and based directly on the pricing formula. Compare your answers.
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