Chapter 3: Q11-8B (page 360)
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%?
2.8334 years and 2.824 years.
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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?
Question: A 30-year maturity, 8% coupon bond paying coupons semi-annually is callable in five years at a call price of \(1,100. The bond currently sells at a yield to maturity of 7% (3.5% per half-year):
a. What is the yield to call?
b. What is the yield to call if the call price is only \)1,050?
c. What is the yield to call if the call price is $1,100 but the bond can be called in two years instead of five years?
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%.
Question: Under the expectations hypothesis, if the yield curve is upward-sloping, the market must expect an increase in short-term interest rates. True/false/uncertain? Why?
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?
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