A bond has a Modified duration of 6.3 years and a convexity of 103.1. Interest ratesare currently constant at 9.3%. There is a 35% chance of interest rates increasing to13.1%, a 54% chance of interest rates staying constant, and a 11% chance ofinterest rates decreasing to 7.9%. Under this scenario, which answer below is theclosest to the standard deviation of bond returns?O a. 0.0482O b. 0.0796Oc. 0.0718O d. 0.0940O e. 0.0916O f.0.1017Og. 0.0649Oh. 0.0575

Bond returns refer to the financial gains or losses that an investor earns from holding and/or…

Answered: interest rates decreasing to 7.9%.…

interest rates decreasing to 7.9%. Under this scenario, which answer below is the closest to the standard deviation of bond returns?

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

See similar textbooks

Related questions

Q: 7) By how much will the price of a 30-year zero-coupon bond change if, due to a permanent change in…

A: The Current Market Price of the 30 years zero-coupon bond: The current market price of the 30-year…

Q: All rates in this problem are stated as decimals. Using the precise calculation formula, calculate λ…

A: The probability of default (PD) refers to the likelihood that a borrower (which can be an…

Q: Suppose the real risk-free rate is 2.80%, the average future inflation rate is 2.30%, a maturity…

A: As per the given information:To determine:The difference in the yields on a 5-year A-rated corporate…

Q: The outstanding bonds of Winter Tires Inc. provide a real rate of return of 4.2 percent. If the…

A: Real rate of return = 4.2% = 0.042Rate of inflation = 5.8% = 0.058

Q: The real risk-free rate is 4.19%. Inflation is expected to be 2.1% this year and 4.75% during the…

A: The nominal return refers to the return that the investment provides with no consideration given to…

Q: Required: a. Suppose Baa-rated bonds currently yield 6%, while Aa-rated bonds yield 4%. Now suppose…

A: The confidence Index on bond's yield for top rate bond as compared to the lower graded bond than top…

Q: tations theory suggests that under certain conditions all bonds outstanding, especially Treasury…

A: Zero coupon do not pay any coupon during the life of bond but pay only face value of bond on…

Q: Which of the following observations is the most accurate? 34. A callable bond will have a lower…

A: Please find the answer to the above question below:

Q: Assume that the real risk-free rate is 3.5% and that inflation is expected to be 7% in Year 1, 5.5%…

A: We will calculate Market risk premium using the following formula:…

Q: The market risk premium is 10.0 percent, and the risk-free rate is 4.0 percent. If the expected…

A: Capital Asset Pricing Model (CAPM), is a financial tool used to estimate an investment's expected…

Q: f the current yield of a bond goes down from 6.9% to 4.8%, by what percent does the market price…

A: In terms of finance, current yield can be defined as the return on the bond investment. The formula…

Q: The market risk premium is 9.00 percent, and the risk-free rate is 4.80 percent. If the expected…

A: Market Risk Premium = 9.00 Risk-free rate = 4.80 Expected Return = 10.30 Beta=? If Capital Asset…

Q: Explain how a 1% increase/decrease in interest rates would affect the price of coropate bonds.

A: Bonds are fixed-income group instruments that are issued as a representative of a loan borrowed by a…

Q: Landon is considering the purchase of a $2500 bond from Braydon. There are 5 years remaining until…

A: Given Information : Offer price of bond : $2,500 Time to maturity (n) : 5×2=10 Face value of bond…

Q: Based on a modified duration of 4.1141, the price of the bond should increase by approximately…

A: Modified duration = 4.1141 Increase in YTM = 1.00% Modified duration means expected percentage…

Q: A bond has a yield to maturity of 9.28 percent. If the inflation rate is 2.0 percent, what is the…

A: Data given: Yield to maturity =9.28 % Inflation rate = 2.0% Required: Real rate of return on the…

Q: Which of the following is the correct ranking of the price risk. Bond Coupon Rate Maturity…

A: Solution:Price risk refers to the sensitivity of bond price with respect to change in interest…

Q: The following statements describe the general characteristics of price of the coupon bond. Which one…

A: The price of bond = sum of the present value of coupons + present value of face value when the…

Q: A nominal risk-free rate is currently 3.5%. A broker at INV Securities, has given you the following…

A: Liquidity risk premium and default risk premium are both taken into account to calculating short…

Q: A real risk-free rate is currently -1.0%. A broker at INV Securities, has given you the following…

A: Information on the rates:Inflation premium = 6%Liquidity premium = 2%Maturity risk premium =…

Q: A 10-year maturity bond making annual coupon payments with a coupon rate of 5% and currently selling…

A: Bonds: These are interest-paying securities that are issued by a corporation or the government to…

Q: The market risk premium is 10.0 percent, and the risk-free rate is 3.0 percent. If the expected…

A: CAPM is the linear regression model which is used to compute the expected return of the asset if the…

Q: Assume that the real risk free rate is 3% and the average annual expected inflation rate is 5%. The…

A: Bond is a debt-backed security which is used by investors to reduce risk and increase stable income…

Q: A bond has a Macaulay duration of 6.2 years and convexity of 101.1. Interest rates are currently…

A: Convexity adjusts this approximation by incorporating the curvature of the bond's price-yield…

Q: Required: a. Suppose Baa-rated bonds currently yield 7.0 %, while Aa-rated bonds yield 5.0%. Now…

A: Confidence index at first = Yield Aa rated bonds/ Yield Baa rated bonds.= 5/7 = 0.7143

Q: Suppose we observe the following rates: 1R1 = 4.1%, 1R2 = 4.9%, and E(21) = 4.1%. If the liquidity…

A: 1R1 = 4.1%1R2 = 4.9%E(2r1) = 4.1%

Q: Assume that the risk-free rate (i.e., Rf) is 2.8%. If, for a particular company bond issue, the…

A: Risk free rate = 2.8%Default risk premium = 3.1%Maturity risk premium = 0.9%Market risk premium =…

Q: f you hold the bonds for one year, and interest rates do not change, what total rate of return will…

A: The holding period return is return realized from holding the bond for that period only and all…

Q: Q: ram stimate the standard deviation of a bond's returns if it had the following annual returns…

A: When the yield that is attained from a bond investment is taken for every year, it is recognized as…

Q: What is Bond A's interest rate?

A: Real Risk-Free Rate: It is the rate of return expected from a risk-less investment. It is computed…

Q: A corporate bond has a nominal or observed yield of 9.8%. Your sister, the famous economist, has…

A: Nominal Yield = Risk free rate + inflation risk premium + default risk premium + maturity premium +…

Q: Suppose we observe the following rates: 1R1 = 6.7, 1R2 = 7.4, and E(2r1) = 6.7. If the liquidity…

A: The liquidity premium theory refers to the concept that argues that bonds with a longer term of…

Q: Suppose the real risk-free rate of interest is 2%. Inflation is expected to be 2% for 2 years and…

A: The nominal interest rate on a bond is the stated rate of interest that the issuer agrees to pay to…

Q: Given a real rate of interest of 3.4%, an expected inflation premium of 3.6%, and risk premiums for…

A: The capital asset pricing model (CAPM) refers to the model which tells us how the financial markets…

Q: The outstanding bonds of Winter Tires Inc. provide a real rate of return of 3.2 percent. If the…

A: The Fisher equation, named after economist Irving Fisher, is a fundamental concept in macroeconomics…

Q: Suppose that the current one-year rate (one-year spot rate) and expected one-year government bonds…

A: Given: 1R1 = 4.80%, E(2r1) = 5.45%, E(3r1) = 5.95%, E(4r1) = 6.10%

Q: al risk-free rate is 2.70%, inflation is expected to be 3.45% this year, and the maturity risk…

A: Nominal rate includes the real rate of return and the other is inflation Both are included the in…

Q: There is a bond, which has a duration of 7 and a convexity of 40. Compute exact and approximate…

A: Since you have posted a question with multiple sub parts, we will be able to provide the solution…

Q: If the YTM on a bond is 17.5 %, what will be the periodic rate assuming the bond is paying coupons…

A: YTM = 17.5% Number of coupon payment per year = 2

Q: A bond portfolio is given with a modified duration of 3,12 and modified convexity of 5,01. YTM for…

A: Duration and convexity are the tools used to understand the risk of a bond. Duration helps in…

Q: True/False? Explain your choice for each in short: The duration approximation would provide a…

Q: he longer the term a bond has before it matures, ______________ will be the affect on its value due…

A: This pertains to sensitivity of bond price or bond value to changes in interest rates. Long term…

Q: Assume that the risk-free interest rate (guaranteed by government bonds) is 4% (annual), and there a…

A: Current stock price is 50 Stock price after one year can be 60 or 45 Probability associated with…

Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

A bond has a Modified duration of 6.3 years and a convexity of 103.1. Interest rates
are currently constant at 9.3%. There is a 35% chance of interest rates increasing to
13.1%, a 54% chance of interest rates staying constant, and a 11% chance of
interest rates decreasing to 7.9%. Under this scenario, which answer below is the
closest to the standard deviation of bond returns?
O a. 0.0482
O b. 0.0796
Oc. 0.0718
O d. 0.0940
O e. 0.0916
O f.
0.1017
Og. 0.0649
Oh. 0.0575

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction to Bond Returns

VIEW

Step 2: Closest Standard Deviation of Bond Returns Calculation

VIEW

Solution

VIEW

Step by step

Solved in 3 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Suppose we observe the following rates: 1R₁ = 0.95%, 1R2 = 1.45%, and E(2r1) = 0.927%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2 ? Note: Do not round intermediate calculations. Round your percentage answer to 3 decimal places (i.e., 0.12345 should be entered as 12.345). Liquidity premium %
The maturity risk premium for Vonda bonds are 3%, default risk premium for Vonda bonds are 4%, and the liquidity risk premium for Vonda bonds are 2%. The real rate of return is 3% and the inflation premium is 3%. What is the nominal rate of return?
If the interest rates on 1-, 5-, 20-, and 30-year bonds are (respectively)4%, 5%, 6%, and 7%, then how would you describe the yield curve?How would you describe it if the rates were reversed?
Suppose the returns on long-term government bonds are normally distributed. Assume long-term government bonds have a mean return of 6.1 percent and a standard deviation of 9.8 percent. What is the approximate probability that your return on these bonds will be less than −3.7 percent in a given year? Use the NORMDIST function in Excel® to answer this question. Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. What range of returns would you expect to see 95 percent of the time? Note: A negative answer should be indicated by a minus sign. Enter your answers from lowest to highest. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. What range would you expect to see 99 percent of the time? Note: A negative answer should be indicated by a minus sign. Enter your answers from lowest to highest. Do not round intermediate calculations and enter…
The interest rate changes to i' in the second period. Evaluate the rates of return when you sell the bond after one period in the case of the change being (i) anticipated (ii) unanticipated. ? [P'
The risk free rate is 1.7%, inflation is expected to be 3.5%, a corporate bond has a yield rate of 8.7%, which includes a 1% liquidity premium. What is the default risk premium? (ignore the maturity risk) Group of answer choices a)4.2% b)2.5% c)3.5% d)Not enough information
Consider a portfolio of bonds that have an average default rate of 1%. The correlation between normalized default times for these bonds is 0.14. What is the 99.9% worst-case default rate for this bond portfolio? Note: Your answer must be expressed in percentage terms and accurate to within 0.16.
why the increases in bond price are larger than the decreases in terms of dollars for the same change (say, 1% change) in the market interest rate
If the real rate of interest is 2%, inflation is expected to be 3% during the coming year, and the default risk premium, illiquidity risk premium, and maturity risk premium for the Bonds-R-Us Corporation are all 1% each, what would be the yield (stated rate) on a Bonds-R-Us bond?
Which one of the following will decrease the current yield of a bond? changing the frequency of coupon payment from semi-annual to annual. increasing the face value. increasing the coupon rate. decreasing the yield to maturity. decreasing the bond price.
Can you explain the working for the Bond Yield (Annual). If I were to work it outside of Excel, how would I calculate it to get to "8.30%"
Suppose Baa-rated bonds currently yield 6.8%, while Aa-rated bonds yield 4.8 %. Now suppose that due to an increase in the expected Inflation rate, the yields on both bonds increase by 1.2%. What would happen to the confidence Index? (Round your answers to 4 decimal places.) Confidence index from to

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS