Convexity & Duration

e. If we evaluated at the same effective rate, the earlier payments would give the semiannual bond the higher value.

(b) Coupon and principal of the Regular Treasury bonds are fixed, therefore if the inflation rate increases in the forecasting future, investor will receive the same amount of coupon and principal with less real value and purchasing power.

Its coupon rate is 8.3%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 5.3%. The modified duration of this bond is ______ years.

a.a greater amount of interest income over the life of the bond issue than wouldresult from use of the straight-line method.

3. (TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest. The bonds mature in 25 years. What is the current price of the bond if the YTM is 11 percent? Assume annual payments.

So if we start to compare the separate bonds that are presented by these two powerhouse companies we can see that they both have a maturity date of 30 years for a face value of $1,000 and the coupon type is fixed. The coupon rate is less than the current interest rate which means a buyer may want to pay less for that bond. However there are some differences such as the issue size of the two bonds. Apple

b. Generate a graph or table showing how the bond’s present value changes for semi-annually compounded interest rates between 1% and 15%.

The coupon interest rate on a firm’s convertibles is generally set higher than the market yield on its otherwise similar straight debt.

33. An inverted yield curve is a downward-sloping yield curve that indicates generally cheaper long-term borrowing costs than short-term borrowing costs. Answer: TRUE

1. What is the typical relationship between interest rates on three-month Treasury bills, long-term treasury bonds, and Baa corporate bonds?

For two otherwise identical corporate bonds, the one with more idiosyncratic risk should have a price that is

1. Is it possible for the three year bond price to increase while the ten year bond price falls due ONLY to changes in the term structure?

Yields on municipal bonds are often lower than corporate or Treasurybonds with comparable maturities, because of the important advantage of not being taxed at the government level. The feature of this bond is low default risk, may be exempt from local authorities taxes and not very attractive.

– Higher convexity refers to higher curvature in the price-yield relationship. – The convexity of noncallable bonds are usually positive. – The slope of the cuve that shows the price-yield relation increases at higher yields.

(5 points) $100 invested for 10 years at 12% interest is worth more in FV terms than $200 invested for 10 years at 4% interest.