Leah is considering repositioning some of the investments in her bond portfolio. Of thebonds shown below which one has the longest duration and is therefore most sensitive tointerest rate changes. Assume that they are all purchased this year and current interest ratesare 6.2%Bond A: 6.25% coupon Treasury bond with a current price $1,050 that matures in 2030Bond B: Zero coupon Treasury bond with a current price $789 that matures in 2030Bond C: 4.01% AA corporate debenture with a current price $949 that matures in 2030Bond ABond BBond CO They all have the same duration

Approach to solving the question:Bond duration Detailed explanation:To determine which bond has the…

Answered: Leah is considering repositioning some…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 4P

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Similar questions

Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for 1,135.90, producing a nominal yield to maturity of 8%. However, the bond can be called after 5 years for a price of 1,050. (1) What is the bonds nominal yield to call (YTC)? (2) If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?
Your client has decided that the risk of the bond portfolio is acceptable and wishes to leave it as it is. Now your client has asked you to use historical returns to estimate the standard deviation of Blandy’s stock returns. (Note: Many analysts use 4 to 5 years of monthly returns to estimate risk, and many use 52 weeks of weekly returns; some even use a year or less of daily returns. For the sake of simplicity, use Blandy’s 10 annual returns.)
What would be the value of the bond described in Part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return? Would we now have a discount or a premium bond? What would happen to the bond’s value if inflation fell and rd declined to 7%? Would we now have a premium or a discount bond? What would happen to the value of the 10-year bond over time if the required rate of return remained at 13%? If it remained at 7%? (Hint: With a financial calculator, enter PMT, I/YR, FV, and N, and then change N to see what happens to the PV as the bond approaches maturity.)
Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 13% coupon interest rates and pay annual interest. Bond A has exactly 6 years to maturity, and bond B has 16 years to maturity. b.Calculate the present value of bond B if the required rate of return is: (1) 10%, (2) 13%, and (3) 16%. c. From your findings in parts a and b, discuss the relationship between time to maturity and changing required returns. d. If Lynn wanted to minimize interest rate risk, which bond should she purchase? Why? I need all parts and the sub parts answered
Your client is considering one of the two corporate bonds given below. Both bonds pay semi-annual coupons and are currently trading at the same price of ₵102.35. Characteristic Bond A Bond B Market price ₵102.35 ₵102.35 Maturity 2025 2025 Coupon 15% 18% Yield to maturity 10% 13% Macaulay Duration 4.1 years 3.9 years Call Features Noncallable Callable after 18 months at ₵105.00 Using the information in the table above, estimate the percentage price change and the new price for both bonds if the yield falls by 50 basis Briefly discuss why the actual price changes in the two bonds might differ from your estimates calculated in (i) above if the yields actually fall by 50 basis
Your client is considering one of the two corporate bonds given below. Both bonds pay semi-annual coupons and are currently trading at the same price of ₵102.35. Characteristic Bond A Bond B Market price ₵102.35 ₵102.35 Maturity 2025 2025 Coupon 15% 18% Yield to maturity 10% 13% Macaulay Duration 4.1 years 3.9 years Call Features Noncallable Callable after 18 months at ₵105.00 Using the information in the table above, estimate the percentage price change and the new price for both bonds if the yield falls by 50 basis Briefly discuss why the actual price changes in the two bonds might differ from your estimates calculated in (i) above if the yields actually fall by 50 basis 3. In each case indicate whether the actual price will be higher or lower than the estimated price and why. (Credit will be given for graphical illustration of concepts)
Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 11% coupon interest rates and pay annual interest. Bond A has exactly 10 years to maturity, and bond B has 20 years to maturity. a. Calculate the present value of bond A if the required rate of return is: (1) 8%, (2) 11%, and (3) 14%. b. Calculate the present value of bond B if the required rate of return is: (1) 8%, (2) 11%, and (3) 14%. c. From your findings in parts a and b, discuss the relationship between time to maturity and changing required returns. d. If Lynn wanted to minimize interest rate risk, which bond should she purchase? Why?
Lin has a B rated $30,000 bond with a coupon of 2.5% maturing in 2030 that is currently yielding 3.2%. This year, the Fed is expected to lower interest rates by 50 basis points. Explain the effect on the price, yield and cash flow of the bond. (indicate if it will increase or decrease)
Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 13% coupon interest rates and pay annual interest. Bond A has exactly 6 years to maturity, and bond B has 16 years to maturity. a.Calculate the present value of bond A if the required rate of return is: (1) 10%, (2) 13%, and (3) 16%. b.Calculate the present value of bond B if the required rate of return is: (1) 10%, (2) 13%, and (3) 16%. c. From your findings in parts a and b, discuss the relationship between time to maturity and changing required returns. d. If Lynn wanted to minimize interest rate risk, which bond should she purchase? Why? I need all parts and the sub parts answered
Stacy Picone is an aggressive bond trader who likes to speculate on interest rate swings. Market interest rates are currently at 10.0%, but she expects them to fall to 8.0% within a year. As a result, Stacy is thinking about buying either a 25-year, zero-coupon bond or a 20-year, 8.5% bond. (Both bonds have $1,000 par values and carry the same agency rating.) Assuming that Stacy wants to maximize capital gains, which of the two issues should she select? What if she wants to maximize the total return (interest income and capital gains) from her investment? Why did one issue provide better capital gains than the other? Based on the duration of each bond, which one should be more price volatile? The capital gain of the zero-coupon bond is $65.4065.40. (Round to the nearest cent.) The capital gain of the coupon-bearing bond is $nothing. (Round to the nearest cent.)
Stacy Picone is an aggressive bond trader who likes to speculate on interest rate swings. Market interest rates are currently at 10.5%,but she expects them to fall to 8.5% within a year. As a result, Stacy is thinking about buying either a 25-year, zero-coupon bond or a 20-year, 9.0% bond. (Both bonds have $1,000 par values and carry the same agency rating.) Assuming that Stacy wants to maximize capital gains, which of the two issues should she select? What if she wants to maximize the total return (interest income and capital gains) from her investment? Why did one issue provide better capital gains than the other? Based on the duration of each bond, which one should be more price volatile?
Based on the following data, calculate an expected price and standard deviation. (Face value= 1,000 I = 7%) Maturity of the bond is 4 years; you are going to sell it next year, so that remaining maturity is 3 years Probability Required Yield Price Prob* Price Prob (P-EP) 2 0.5 7.00% 0.1 7.20% 0.4 7.40% What is your expected price when you sell the bond? What is the standard deviation of the bond price?

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