Chapter 3: Q11-6B (page 360)
Is the decrease in a bond’s price corresponding to an increase in its yield to maturity more or less than the price increase resulting from a decrease in the yield of equal magnitude?
The increase will be larger than decrease in price
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
Return to Table 10.1 and calculate both the real and nominal rates of return on the TIPS bond in the second and third years.
Time | Inflation in Year just ended | Par Value | Coupon Payment | Coupon Payment + Principal payment | Total Payment |
0 | \( 1000 .00 | ||||
1 | 2 | \) 1020.00 | \( 40.80 | 0 | \) 40.80 |
2 | 3 | \( 1050. 60 | \) 42.02 | 0 | \( 42.02 |
3 | 1 | \) 1061.11 | \( 42.44 | \) 1061.11 | 1103.54 |
If the plan in the previous problem wants to fund and immunize its position fully, how much of its portfolio should it allocate to one-year zero-coupon bonds and perpetuities, respectively, if these are the only two assets? Funding the plan?.
“A pension plan is obligated to make disbursements of \(1 million, \)2 million, and $1 million at the end of the next three years, respectively.”
You are managing a portfolio of $1 million. Your target duration is ten years, and you can choose from two bonds: a zero-coupon bond with a maturity of 5 years and an infinity, each yielding 5%.
An a. How much of each bond will you hold in your portfolio?
b. How will these fractions change next year if the target duration is nine years?
You predict that interest rates are about to fall. Which bond will give you the highest capital gain?
a. Low coupon, long-maturity
b. High coupon, short maturity
c. High coupon, long maturity
d. Zero coupon, long maturity
Question: Assume you have a one-year investment horizon and are trying to choose among three bonds. All have the same degree of default risk and mature in 10 years. The first is a zero-coupon bond that pays \(1,000 at maturity. The second has an 8% coupon rate and pays the \)80 coupon once per year. The third has a 10% coupon rate and pays the $100 coupon once per year.
a. If all three bonds are now priced to yield 8% to maturity, what are their prices?
b. If you expect their yields to maturity to be 8% at the beginning of next year, what will their prices be then? What is your rate of return on each bond during the one-year holding period?
What do you think about this solution?
We value your feedback to improve our textbook solutions.
