Chapter 3: Q11-1CP (page 363)
Rank the following bonds in order of descending duration.
Bond | Coupon | Time to Maturity | Yield to maturity |
A | 15% | 20 | 10% |
B | 15 | 15 | `10 |
C | 0 | 20 | 10 |
D | 8 | 20 | 10 |
E | 15 | 15 | 15 |
C, D, A, B & E.
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A bond has a current yield of 9% and a yield to maturity of 10%. Is the bond selling above or below par value? Explain.
a. Janet Meer is a fixed-income portfolio manager. Noting that the current shape of the yield curve is flat, she considers the purchase of a newly issued, option-free corporate bond priced at par; the bond is described in Table 11.9. Calculate the duration of the bond.
Meer is also considering the purchase of a second newly issued, option-free corporate bond, which is described in Table 11.10. She wants to evaluate this second bond’s price sensitivity to an instantaneous, downward parallel shift in the yield curve of 200 basis points. Estimate the total percentage price change for the bond if the yield curve experiences an instantaneous, downward parallel shift of 200 basis points.
You own a fixed-income asset with a duration of five years. If the level of interest rates, which is currently 8%, goes down by ten basis points, how much do you expect the asset price to go up (in percentage terms)?
Question: A 10-year bond of a firm in severe financial distress has a coupon rate of 14% and sells for $900. The firm is currently renegotiating the debt, and it appears that the lenders will allow the firm to reduce coupon payments on the bond to one-half the originally contracted amount. The firm can handle these lower payments. What are the stated and expected yields to maturity of the bonds? The bond makes its coupon payments annually.
The following bond swaps could have been made in recent years as investors attempted to increase the total return on their portfolio.
From the information presented below, identify possible reason(s) that investors may have made each swap.
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