The yield of the 10-year US Treasury bond is 1.20%. It is the risk-free rate. You work for investment manager and your boss asks you to calculate the price of a 10-year corporate bond that yields 3.00% more than its risk-free rate and has a face value of $1,000. The fixed coupon of this corporate bond is 5.00%. Both bonds pay coupons annually. ● ● What is the current price of the corporate bond? Calculate the price of the bond if its yield increased by 1.00%. Calculate the price of the bond if its yield decreased by 1.00%. Please discuss the risk associated with this change in interest rates?

The yield of the 10-year US Treasury bond is 1.20%. It is the risk-free rate. You work for investment manager and your boss asks you to calculate the price of a 10-year corporate bond that yields 3.00% more than its risk-free rate and has a face value of $1,000. The fixed coupon of this corporate bond is 5.00%. Both bonds pay coupons annually. ● ● What is the current price of the corporate bond? Calculate the price of the bond if its yield increased by 1.00%. Calculate the price of the bond if its yield decreased by 1.00%. Please discuss the risk associated with this change in interest rates?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 9P

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The yield of the 10-year US Treasury bond is 1.20%. It is the risk-free rate. You workfor investment manager and your boss asks you to calculate the price of a 10-yearcorporate bond that yields 3.00% more than its risk-free rate and has a face value of$1,000. The fixed coupon of this corporate bond is 5.00%. Both bonds pay couponsannually.• What is the current price of the corporate bond?• Calculate the price of the bond if its yield increased by 1.00%.• Calculate the price of the bond if its yield decreased by 1.00%.• Please discuss the risk associated with this change in interest rates?
The yield of the 10-year US Treasury bond is 1.20%. It is the risk-free rate. You work for investment manager and your boss asks you to calculate the price of a 10-year corporate bond that yields 3.00% more than its risk-free rate and has a face value of$1,000. The fixed coupon of this corporate bond is 5.00%. Both bonds pay coupons annually. • What is the current price of the corporate bond? • Calculate the price of the bond if its yield increased by 1.00%.• Calculate the price of the bond if its yield decreased by 1.00%. Please explain the process and show the calculations/formulas.
The yield of the 10-year US Treasury bond is 1.20%. It is the risk-free rate. You work for investment manager and your boss asks you to calculate the price of a 10-year corporate bond that yields 3.00% more than its risk-free rate and has a face value of $1,000. The fixed coupon of this corporate bond is 5.00%. Both bonds pay coupons annually.• What is the current price of the corporate bond?• Calculate the price of the bond if its yield increased by 1.00%.• Calculate the price of the bond if its yield decreased by 1.00%.• Please discuss the risk associated with this change in interest rates
a. Consider a hypothetical scenario where you have a default-free floating rate bond and a corporate floating rate bond with maturities of 5 years. The current default- free floating rate is 4% and the corporate floating rate is 6%. While the rates are quoted annually, both bonds pay coupons semi-annually. The face value of both bonds is $100. Describe step-by-step how you would set up the positions (long and short) to mimic the cash flows of a credit default swap. What would be the CDS rate? b. Assume the "loss given default” is $40 in the problem above. Suppose the loss given default changes and becomes $60. How would the CDS rate change given the increase in "loss given default." c. Suppose the probability of default before 5 years is 2% in the above problem. Now imagine that the probability of default falls to 1%. How would the CDS rate change?
Consider two bonds: Bond M and Bond L. Bond M pays a 6% coupon, while Bond L pays a 10% coupon. Interest rates are currently 8%. Suppose you have a friend who tells you that if rates rise to 12%, that the price of Bond M will rise and the price of Bond L will fall. Is your friend correct?
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Bond X is a premium bon making annual payments. The bond pays 8% coupon, has YTM of 6% and has 13 years to maturity. Bond Y is a discount bond making annual payments. This bond pays a 6% coupon, has an YTM of 8% and also has 13 years to maturity. The nominal value of both bonds is £1,000. What are the prices of these bonds today? If interest rates remain unchanged, what do you expect the prices of these bonds to be in one year? In three years? In eight years? In twelve, thirteen years? What is going on here? Illustrate your answers by graphing bond prices versus time to maturity.
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Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Required: a. Calculate the forward rate of interest for each year. b. How could you construct a 1-year forward loan beginning in year 3? c. How could you construct a 1-year forward loan beginning in year 4? Required A Price $940.93 Complete this question by entering your answers in the tabs below. 868.39 800.92 735.40 670.48 Required B Maturity (years) 2 3 Calculate the forward rate of interest for each year. Note: Round your answers to 2 decimal places. Required C Forward Rate % % Prov 12 of 12 Next
Suppose that you want to construct a 2-year maturity forward loan commencing in 3 years. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Price $ 996.04 895.89 833.92 772.80 675.18 Required: a. Suppose that you buy today one 3-year maturity zero-coupon bond with face value $1,000. How many 5-year maturity zeros would you have to sell to make your initial cash flow equal to zero (specifically, what must be the total face value of those 5-year zeros)? b. What are the cash flows on this strategy in each year? c. What is the effective 2-year interest rate on the effective 3-year-ahead forward loan? d. & e. Confirm that the effective 2-year forward interest rate equals (1 + f4) ×(1 + f5)-1. You therefore can interpret the 2-year loan rate as a 2-year forward rate for the last two years. Alternatively, show that the effective 2-year forward rate equals (1 + y5) 15 + (1+y3) ³. - 1
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