INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 16, Problem 11CP
A
Summary Introduction
To calculate:The modified duration of bond.
Introduction:The mentioned bond is option free corporate bond having 7% coupon with maturity period of 10 years. The modified duration for these bonds is equal to the effective duration of bond.
B
Summary Introduction
To calculate:Change in price of the bond in yield- curve circumstances.
Introduction:The total change in price is the sum of the price change due to time period of the bond and the convexity adjustment of the bond. Here the value of adjustment is 1.66%. This bond is option-free in nature.
C
Summary Introduction
To select: The value of convexity will be negative when interest rates falls.
Introduction : Negative convexity of a bond represents by a concave curve between yield and price. For callable bonds the price will never be increased when interest rates fall down.
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Assume that you are considering the purchase of a 30-year, noncallable bond with an annual coupon rate of 13.0%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 9.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
You are not required to show calculations. However to receive credit you must provide the inputs used (N, PMT, FV, I/Y, PV) to solve. If you utilize a template, you can copy and paste the section used in the submission.
$699.34
$1,000.00
$1,412.76
•
When the bond’s coupon rate is less than the bondholder’s required return, the bond’s intrinsic value will be less than its par value, and the bond will trade at .
For example, assume Oliver wants to earn a return of 10.50% and is offered the opportunity to purchase a $1,000 par value bond that pays a 8.75% coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond’s intrinsic value:
Intrinsic ValueIntrinsic Value
= =
A(1+C)1+A(1+C)2+A(1+C)3+A(1+C)4+A(1+C)5+A(1+C)6+B(1+C)6A1+C1+A1+C2+A1+C3+A1+C4+A1+C5+A1+C6+B1+C6
Complete the following table by identifying the appropriate corresponding variables used in the equation.
Unknown
Variable Name
Variable Value
A
B
$1,000
C
Semiannual required return
Based on this equation and the data, it is to expect that Oliver’s potential bond investment is currently exhibiting an intrinsic value less than…
You observe the following prices of Treasury securities per $100 of par value: • a 6-month T-bill sells for 96.1538 • a 1-year T-bill sells for 94.2596 • a 1.5-year 10% coupon T-bond sells for 104.9142 Assume that the pure expectations theory of the term structure holds. a.) Calculate the 6-month, 1-year, and 1.5-year spot rates on a bond-equivalent yield basis.
Chapter 16 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
Ch. 16 - Prob. 1PSCh. 16 - Prob. 2PSCh. 16 - Prob. 3PSCh. 16 - Prob. 4PSCh. 16 - Prob. 5PSCh. 16 - Prob. 6PSCh. 16 - Prob. 7PSCh. 16 - Prob. 8PSCh. 16 - Prob. 9PSCh. 16 - Prob. 10PS
Ch. 16 - Prob. 11PSCh. 16 - Prob. 12PSCh. 16 - Prob. 13PSCh. 16 - Prob. 14PSCh. 16 - Prob. 15PSCh. 16 - Prob. 16PSCh. 16 - Prob. 17PSCh. 16 - Prob. 18PSCh. 16 - Prob. 19PSCh. 16 - Prob. 20PSCh. 16 - Prob. 21PSCh. 16 - Prob. 22PSCh. 16 - Prob. 23PSCh. 16 - Prob. 24PSCh. 16 - Prob. 25PSCh. 16 - Prob. 1CPCh. 16 - Prob. 2CPCh. 16 - Prob. 3CPCh. 16 - Prob. 4CPCh. 16 - Prob. 5CPCh. 16 - Prob. 6CPCh. 16 - Prob. 7CPCh. 16 - Prob. 8CPCh. 16 - Prob. 9CPCh. 16 - Prob. 10CPCh. 16 - Prob. 11CPCh. 16 - Prob. 12CPCh. 16 - Prob. 13CP
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