Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions. Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed-rate bond and note. Both the bond and note have semiannual coupon periods. Unless otherwise stated, all interest rate changes are parallel. The characteristics of these securities are shown in the following table. He also considers a 9-year floating-rate bond (floater) that pays a floating rate semiannually and is currently yielding 5%. Characteristics of Fixed-Rate Bond and Fixed-Rate Note Fixed-Rate Fixed-Rate Bond Note 107.18 5.00% 9 100.00 5.00% 4 6.9848 3.5851 Price Yield to maturity Time to maturity (years) Modified duration (years) Spice asks Meyers to quantify price changes from changes in interest rates. To illustrate, Meyers computes the value change for the fixed-rate note in the table. Specifically, he assumes an increase in the level of interest rate of 100 basis points. Using the information in the table, what is the predicted change in the price of the fixed-rate note? Note: Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.
Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions. Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed-rate bond and note. Both the bond and note have semiannual coupon periods. Unless otherwise stated, all interest rate changes are parallel. The characteristics of these securities are shown in the following table. He also considers a 9-year floating-rate bond (floater) that pays a floating rate semiannually and is currently yielding 5%. Characteristics of Fixed-Rate Bond and Fixed-Rate Note Fixed-Rate Fixed-Rate Bond Note 107.18 5.00% 9 100.00 5.00% 4 6.9848 3.5851 Price Yield to maturity Time to maturity (years) Modified duration (years) Spice asks Meyers to quantify price changes from changes in interest rates. To illustrate, Meyers computes the value change for the fixed-rate note in the table. Specifically, he assumes an increase in the level of interest rate of 100 basis points. Using the information in the table, what is the predicted change in the price of the fixed-rate note? Note: Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.
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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Transcribed Image Text:Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice,
is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions.
Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed-rate bond and note. Both the bond and note have
semiannual coupon periods. Unless otherwise stated, all interest rate changes are parallel. The characteristics of these securities are
shown in the following table. He also considers a 9-year floating-rate bond (floater) that pays a floating rate semiannually and is
currently yielding 5%.
Characteristics of Fixed-Rate Bond and Fixed-Rate Note
Fixed-Rate Fixed-Rate
Note
Bond
107.18
5.00%
9
100.00
5.00%
4
6.9848
3.5851
Price
Yield to maturity
Time to maturity (years)
Modified duration (years)
Spice asks Meyers to quantify price changes from changes in interest rates. To illustrate, Meyers computes the value change for the
fixed-rate note in the table. Specifically, he assumes an increase in the level of interest rate of 100 basis points. Using the information
in the table, what is the predicted change in the price of the fixed-rate note?
Note: Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.
Predicted price change
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