Problem 6-19 Interest Rate Risk (LO3)Consider three bonds with 5.10% coupon rates, all making annual coupon payments and all selling at face value. The short-term bond has a maturity of 4 years, the intermediate-term bond has a maturity of 8 years, and the long-term bond has amaturity of 30 years.a. What will be the price of the 4-year bond if its yield increases to 6.10%? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.)b. What will be the price of the 8-year bond if its yield increases to 6.10%? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.)c. What will be the price of the 30-year bond if its yield increases to 6.10%? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.)d. What will be the price of the 4-year bond if its yield decreases to 4.10%? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.)e. What will be the price of the 8-year bond if its yield decreases to 4.10%? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.)f. What will be the price of the 30-year bond if its yield decreases to 4.10%? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.)g. Comparing your answers to parts (a), (b), and (c), are long-term bonds more or less affected than short-term bonds by a risein interest rates?h. Comparing your answers to parts (d), (e), and (f), are long-term bonds more or less affected than short-term bonds by adecline in interest rates?Bond price$965.43a.b.Bond price$938.15Bond price$863.81с.d.Bond price$1,036.21e.Bond price$1,067.05f.Bond price$1,170.84g.Long-term bondsaffected than short-term bondsh.Long-term bondsaffected than short-term bonds

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Answered: Consider three bonds with 5.10% coupon…

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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According to the expectations theory, what will be the interest rate on a three-year bond if the two-year term premium is 1.0% while the three-year term premium is 2.0%, and a one-year bond has an interest rate of 4% and is expected to have an interest rate of 5% next year and 6% in two year? Select one: Oa. 6.0% O b. 15.0% Oc. 5.0% O d. 4.0%
A bond sells for $894.17 and has a coupon rate of 6.20 percent. If the bond has 13 years until maturity, what is the yield to maturity of the bond? Assume semiannual compounding. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Consider two bonds, a 3-year bond paying annual coupons at 5% and a 10-year bond also paying annual coupons at 5%. Coupons are paid annually (not semiannually). Both are currently trading at par (i.e., price = face value). A. What must be the current discount rate for these bonds? B. Suppose that the discount rate for these bonds suddenly rise to 9%. What is the new price of the 3-year bond? What is the new price of the 10-year bond? C. Compare the price changes (i.e., the current price of $1,000 vs. the new bond price from Part B) of two bonds. Determine whether long-term or short-term bonds are more sensitive to interest rate fluctuation.
A 6.25 percent coupon bond with 15 years left to maturity is priced to offer a yield to maturity of 7.5 percent. You believe that in one year, the yield to maturity will be 7.0 percent. Assuming semiannual interest payments, what is the change in price the bond will experience in dollars? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
A Treasury STRIP is a zero-coupon US Treasury bond. If the STRIP's yield-to-maturity is 2.5%, par value is $1,000, and 7 years remain until maturity, what is the bond's price today? Use a semi-annual compounding period in your calculations. Enter your answer as a positive number rounded to the nearest penny.
Compute the price of a 6.1 percent coupon bond with 15 years left to maturity and a market interest rate of 9.0 percent. (Assume interest payments are semiannual.) (Do not round intermediate calculations. Round your final answer to 2 decimal places.) Is this a discount or premium bond?
A newly issued bond pays its coupons once a year. Its coupon rate is 4.7%, its maturity is 15 years, and its yield to maturity is 7.7%. a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 6.7% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Holding-period return % b. If you sell the bond after one year when its yield is 6.7%, what taxes will you owe if the tax rate on interest income is 40% and the tax rate on capital gains income is 30%? The bond is subject to original-issue discount (OID) tax treatment. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Tax on interest income $ Tax on capital gain $ Total taxes $ c. What is the after-tax holding-period return on the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)…
Consider three bonds with 5.70% coupon rates, all making annual coupon payments and all selling at face value. The short-term bond has a maturity of 4 years, the intermediate-term bond has a maturity of 8 years, and the long-term bond has a maturity of 30 years. a. What will be the price of the 4-year bond if its yield increases to 6.7%b. What will be the price of the 8-year bond if its yield increases to 6.7%? c. What will be the prince of the 30-year-bond if it's yield increases to 6.7% d. What will be the price of the 4-year-bond if it's yield decreases to 4.7% e. What will be the price of the 8-year-bond if it's yield decreases to 4.7%?f. What will be the price of the 30-year-bond if it's yield decreases to 4.7%?g. Are long-term bonds more or less affected than short-term bonds by a rise in interest rates? h. Are long-term bonds more or less affected than short-term bonds by a decline in interest rates?
Suppose the market interest rate is 5%. Valuate the following bonds. (i) a 3-year discount bond with a face value of £100,000 (ii) a 3-year coupon bond with a face value of £98,000 and a coupon rate of 5% (iii) Given the different face values of the two, explain the difference between your answers to part i and ii.

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