Chapter 3: 10-8B (page 329)
Consider a bond with a 10% coupon and with yield to maturity 5 8%. If the bond’s YTM remains constant, then in one year will the bond price be higher, lower, or unchanged? Why?
The bond price will be lower than it was at the beginning of the year.
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Long-term Treasury bonds currently sell at yields to maturity of nearly 8%. You expect interest rates to fall. The rest of the market thinks that they will remain unchanged over the coming year.
Choose the bond that will provide the higher capital gain in each question if you are correct. Briefly explain your answer.
a. (1) A Baa-rated bond with a coupon rate of 8% and a time to maturity of 20 years.
(2) An Aaa-rated bond with a coupon rate of 8% and a time to maturity of 20 years.
b. (1) An A-rated bond with a coupon rate of 4% and maturity of 20 years, callable at
105.
(2) An A-rated bond with a coupon rate of 8% and maturity of 20 years, callable at
105.
c. (1) A 6% coupon noncallable T-bond with a maturity of 20 years and YTM 5 8%.
(2) A 9% coupon noncallable T-bond with a maturity of 20 years and YTM 5 8%.
Consider a bond paying a coupon rate of 10% per year semi-annually when the market interest rate is only 4% per half-year. The bond has three years until maturity.
a. Find the bond’s price today and six months from now after the next coupon is paid.
b. What is the total rate of return on the bond?
How can perpetuity, which has an infinite maturity, have a duration as short as 10 or 20 years?
You buy an eight-year bond that has a 6% current yield and a 6% coupon (paid annually). In one year, promised yields to maturity have risen to 7%. What is your holding-period return?
Find the bond duration with a settle ement date of May 27, 2012, and a maturity date of November 15, 2021. The bond’s coupon rate is 7%, and the bond pays coupons semi-annually.
The bond is selling at a yield to maturity of 8%. You can use Spreadsheet 11.2, available at www.mhhe.com/bkm; link to Chapter 11 material.
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