First, we have US five-year bonds, issued on April 1, 2020, and with a 1% annual coupon. Second, there are the debt securities of Nordea, a Finnish private bank, due on August 18, 2027, and with a coupon of 3.75% per year (issued in dollars). Finally, another option is JP Morgan bonds with a 3-month LIBOR variable coupon plus 0.25%, which mature on December 31, 2025. The discount rate for all public debt is 2.5%, while for private debt it is 3.5%. Likewise, the notional amount of all bonds is $1000, and the current date is July 1, 2023.   Answer the following questions: What is the Macaulay duration, the modified duration of US Treasury bonds and the duration of the Nordea bonds? If the fixed discount rate depends on the 3 month LIBOR, would the variable coupon bonds last? Why?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
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First, we have US five-year bonds, issued on April 1, 2020, and with a 1% annual coupon. Second, there are the debt securities of Nordea, a Finnish private bank, due on August 18, 2027, and with a coupon of 3.75% per year (issued in dollars). Finally, another option is JP Morgan bonds with a 3-month LIBOR variable coupon plus 0.25%, which mature on December 31, 2025. The discount rate for all public debt is 2.5%, while for private debt it is 3.5%. Likewise, the notional amount of all bonds is $1000, and the current date is July 1, 2023.

 

Answer the following questions:

  • What is the Macaulay duration, the modified duration of US Treasury bonds and the duration of the Nordea bonds?
  • If the fixed discount rate depends on the 3 month LIBOR, would the variable coupon bonds last? Why?
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