Assume that you own a $1 million par value corporate bond that pays 7 percent in coupon interest (3.5 percent semiannually), has four years remaining to maturity, and is immediately callable at par. Its current market yield is 7 percent and it is priced at par. If rates on comparable securities fall by more than 40 basis points (0.2 percent semiannually), the bond will be called. a. Calculate the bond’s price if the market rate increases by 50 basis points (0.25percent semiannually) using the present value formula PV = FVn/(1 + i)^n b. Calculate the bond’s effective duration assuming a 50 basis-point increase or decrease in market rates
Assume that you own a $1 million par value corporate bond that pays 7 percent in coupon interest (3.5 percent semiannually), has four years remaining to maturity, and is immediately callable at par. Its current market yield is 7 percent and it is priced at par. If rates on comparable securities fall by more than 40 basis points (0.2 percent semiannually), the bond will be called. a. Calculate the bond’s price if the market rate increases by 50 basis points (0.25percent semiannually) using the present value formula PV = FVn/(1 + i)^n b. Calculate the bond’s effective duration assuming a 50 basis-point increase or decrease in market rates
Chapter5: The Time Value Of Money
Section: Chapter Questions
Problem 11P
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Assume that you own a $1 million par value corporate bond that pays 7 percent in coupon interest (3.5 percent semiannually), has four years remaining to maturity, and is immediately callable at par. Its current market yield is 7 percent and it is priced at par. If rates on comparable securities fall by more than 40 basis points (0.2 percent semiannually), the bond will be called.
a. Calculate the
b. Calculate the bond’s effective duration assuming a 50 basis-point increase or decrease in market rates
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