Chapter 3: Q.12I (page 360)
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)?
Answer
0.463% increase
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Question: Is the coupon rate of the bond in the previous problem more or less than 9%?
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.
Question: The yield curve is upward-sloping. Can you conclude that investors expect short-term interest rates to rise? Why or why not?
A coupon bond paying semi-annual interest is reported as having an ask price of 117% of its $1,000 par value. If the last interest payment was made one month ago and the coupon rate is 6%, what is the invoice price of the bond?
Question: A two-year bond with par value \(1,000 making annual coupon payments of \)100 is priced at $1,000. What is the yield to maturity of the bond? What will be the realized compound yield to maturity if the one-year interest rate next year turns out to be:
( a ) 8%,
( b ) 10%,
( c ) 12%?
You will be paying $10,000 a year in tuition expenses at the end of the next two years. Bonds currently yield 8%.
An a. What is the present value and duration of your obligation?
b. What maturity zero-coupon bond would immunize your obligation?
c. Suppose you buy a zero-coupon bond with value and duration equal to your obligation. Now suppose that rates immediately increase to 9%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation? What if rates fall to 7%?
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