Chapter 11, Problem 7CP

Summary Introduction

(a)

To calculate:

The modified duration of each of the following:

1. The 4.75% Treasury security due 2045(Use the data on price changes when yields change.)
2. The total bond portfolio.

Introduction:

A bond can be defined as a security that creates an obligation on the issuer to make specific payments to the holder for a specified period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond.

Yield to maturity means the discount rate which makes the present payments from the bond equal to the price, in simple terms it is the average rate of return a holder can expect from that bond.

Current yield is a bond's annual income divided by the current price of the security.

Modified duration is termed as the measuring the change in the value of a security with response to a change in the rate of interest.

Summary Introduction

(b)

To discuss:

The circumstance in which Van Huesen's remark would be correct.

Introduction:

A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond. Yield to maturity means the discount rate which makes the present payments from the bond equal to the price, in simple terms it is the average rate of return a holder can expect from that bond.

Current yield is a bond's annual income divided by the current price of the security.

Modified duration is termed as the measuring the change in the value of a security with response to a change in the rate of interest.