Yields on short-term bonds tend to be more volatile than yields on long-term bonds. Suppose that you have estimated that the yield on 20-year bonds changes by 7.5 basis points for every 20.25- basis-point move in the yield on 5-year bonds. You hold a $1.2 million portfolio of 5-year maturity bonds with modified duration 4 years and desire to hedge your interest rate exposure with T-bond futures, which currently have modified duration 9 years and sell at Fe - $80. How many futures contracts should you sell?

Yields on short-term bonds tend to be more volatile than yields on long-term bonds. Suppose that you have estimated that the yield on 20-year bonds changes by 7.5 basis points for every 20.25- basis-point move in the yield on 5-year bonds. You hold a $1.2 million portfolio of 5-year maturity bonds with modified duration 4 years and desire to hedge your interest rate exposure with T-bond futures, which currently have modified duration 9 years and sell at Fe - $80. How many futures contracts should you sell?

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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A treasury bond with $100 maturity face value has a $9 annual coupon, and 15 years left to maturity. What price will the bond sell for assuming that the 15 year yield to maturity in the market is 4%, 9%, and 14% respectively. (Show working out, without the use of external software such as excel or stata) Explain whether the price movements would have been greater or smaller if a 10 year bond had been used rather than a 15 year one without any further calculations.
9. Interest Rate Risk. Suppose that you are a fixed income portfolio manager at Bourbon Street Capital. You have the following bonds issued by Royal, Inc. and Chartres, LLC in your portfolio and you want to understand the risk profile of your portfolio. Given that both bonds pay semiannual coupons, answer the following questions. (Remember to convert your answer to units of full years.) Coupon Yield to maturity Maturity (years) Royal, Inc. Chartres, LLC. Bond A Bond B 9% 8% 5 $100.00 $104.055 8% 8% 2 Par $100.00 Price $100.00 (a) What is the DV01 (at current prices) for bonds A and B? (b) What are the Macaulay Durations (at current prices) for the two bonds? (c) What are the modified durations for the two bonds? (d) What is the convexity of the two bonds?
Yields on short-term bonds tend to be more volatile than yields on long-term bonds. Suppose that you have estimated that the yield on 20-year bonds changes by 12 basis points for every 18.9-basis-point move in the yield on 5-year bonds. You hold a $45 million portfolio of 5-year maturity bonds with modified duration 4 years and desire to hedge your interest rate exposure with T-bond futures, which currently have modified duration 9 years and sell at Fo contracts should you sell? (Do not round intermediate calculations. Round your final answer to the nearest whole number.) $75. How many futures
Yields on short-term bonds tend to be more volatile than yields on long-term bonds. Suppose that you have estimated that the yield on 20-year bonds changes by 10 basis points for every 15-basis-point move in the yield on 5-year bonds. You hold a $1 million portfolio of 5-year maturity bonds with modified duration 4 years and desire to hedge your interest rate exposure with T-bond futures, which currently have modified duration 9 years and sell at F0 = $95. How many futures contracts should you sell?
The bond J is a bond with a coupon rate of 4%. The bond K is a bond with a coupon rate of 10%. Both bonds have a maturity of 8 years, make semi - annual payments, and have a yield to maturity of 9%. If interest rates suddenly increase by 2%, what is the percentage change in the price of these bonds? And if the rates suddenly decrease by 2%? What does this problem teach you about the interest rate risk of low - coupon bonds?
The rise and fall of a bond's price has a direct inverse relationship to its yield to maturity, or interest rate. As prices go up, the yield declines and vice versa. For example, a $1,000 bond might carry a stated annual yield, known as the coupon of 8%, meaning that it pays $80 a year to the bondholder. If that bond was bought for $870, the actual yield to maturity would be 9.2% ($80 annual interest on $870 of principal). Do you agree with this analysis? Briefly explain.
Yields on short-term bonds tend to be more volatile than yields on long-term bonds. Suppose that you have estimated that the yield on 20-year bonds changes by 12 basis points for every 18.9-basis-point move in the yield on 5-year bonds. You hold a $4.5 million portfolio of 5-year maturity bonds with modified duration 4 years and desire to hedge your interest rate exposure with T-bond futures, which currently have modified duration 9 years and sell at F = $75. How many futures contracts should you sell? (Do not round intermediate calculations. Round your final answer to the nearest whole number.) Number of future contracts
Bond J has a coupon rate of 4.2 percent. Bond K has a coupon rate of 14.2 percent. Both bonds have ten years to maturity, a par value of $1,000, and a YTM of 9.4 percent, and both make semiannual payments. a. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these bonds? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. If interest rates suddenly fall by 2 percent instead, what is the percentage change in the price of these bonds? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a. Percentage change in price b. Percentage change in price Bond J % % Bond K do do % %
Suppose you are considering two possible investment opportunities: a 12-year Treasury bond and a 7-year, AA-rated corporate bond. The current real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years, 3% for the following 4 years, and 4% thereafter. The maturity risk premium is estimated by this formula: MRP = 0.02(t - 1)%. The liquidity premium (LP) for the corporate bond is estimated to be 0.3%. You may determine the default risk premium (DRP), given the company's bond rating, from the following table. Remember to subtract the bond's LP from the corporate spread given in the table to arrive at the bond's DRP. Corporate Bond Yield Rate Spread = DRP + LP U.S. Treasury 0.73 % — AAA corporate 0.93 0.20 % AA corporate 1.33 0.60 A corporate 1.75 1.02 What yield would you predict for each of these two investments? Round your answers to three decimal places. 12-year Treasury yield: 6.553%----->correct 7-year Corporate yield: ? %…
A 5-year Treasury bond has a 4.6% yield. A 10-year Treasury bond yields 6.3%, and a 10-year corporate bond yields 8.85%. The market expects that inflation will average 2.1% over the next 10 years (IP10 = 2.1%). Assume that there is no maturity risk premium (MRP = 0) and that the annual real risk-free rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default risk premium and the liquidity premium are zero for Treasury securities: DRP = LP = 0.) A 5-year corporate bond has the same default risk premium and liquidity premium as the 10-year corporate bond described. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. X Open spreadsheet What is the yield on this 5-year corporate bond? Round your answer to two decimal places. %
There are four similar coupon bonds.If the only differences are their maturities and YTMs.which one would have the most volatile market price when there is a fluctuation in the market interest rate?Please carefully explain. 7-year maturity with a 8% YTM 15-year maturity with a 4% YTM 7-year maturity with a 6% YTM 15-year maturity witth a 2% YTM
Now suppose a financial institution has a duration gap of -4 years and $5 million in assets. The cheapest to deliver bond for Treasury futures contracts has a duration of 3 years. How will the manager hedge this interest rate risk? Assume the cheapest to deliver bond is trading at par.

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