Chapter 3: 10-2B (page 328)
What is the option embedded in a callable bond? A puttable bond?
Callable bond gives the option to the issuer to retire the bond at the call date
Puttable bond gives the option to the bond-holder to retire the bond at the call date
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Define the following types of bonds:
a. Catastrophe bond.
b. Eurobond.
c. Zero-coupon bond.
d. Samurai bond.
e. Junk bond.
f. Convertible bond.
g. Serial bond.
h. Equipment obligation bond.
i. Original-issue discount bond.
j. Indexed bond.
Spice asks Meyers (see the previous problem below) to quantify price changes from changes in interest rates. To illustrate, Meyers computes the value change for the fixed-rate note in the table. He assumes an increase in the interest rate level of 100 basis points. Using the information in the table, what is the predicted change in the price of the fixed-rate note?
Frank Meyers, CFA, is a fixed-income portfolio manager for a large pension fund. A member of the Investment Committee, Fred Spice, is very interested in learning about the management of fixed-income portfolios. Spice has approached Meyers with several questions. Specifically, Spice would like to know how fixed-income managers position portfolios to capitalize on their expectations of future interest rates.
Meyers decides to illustrate fixed-income trading strategies to Spice using a fixed rate bond and note. Both bonds have semi-annual coupon periods. All interest rate (yield curve) changes are parallel unless otherwise stated. The characteristics of these securities are shown in the following table. He also considers a nine-year floating-rate bond (floater) that pays a floating rate semi-annually and is currently yielding 5%.
Spice asks Meyers about how a fixed-income manager would position his portfolio to capitalize on expectations of increasing interest rates. Which of the following would be the most appropriate strategy?
a. Shorten his portfolio duration.
b. Buy fixed-rate bonds.
c. Lengthen his portfolio duration.
Find the duration of a 6% coupon bond making annual coupon payments if it has three years until maturity and a yield to maturity of 6%. What is the duration if the yield to maturity is 10%?
Fill in the table below for the following zero-coupon bonds, all of which have par values of \(1,000
Price | Maturity (years) | Yield to Maturity |
\)400 | 20 | ? |
\(500 | 20 | ? |
\)500 | 10 | ? |
? | 10 | 10% |
? | 10 | 8% |
$400 | ? | 8% |
A bond currently sells for \(1,050, which gives it a yield to maturity of 6%. Suppose that if the yield increases by 25 basis points, the price of the bond falls to \)1,025. What is the duration of this bond?
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