# Question

Assume that you own a $ 1 million par value corporate bond that pays 7 percent in coupon interest (3.5 percent semiannually), has four years remaining to maturity, and is immediately callable at par. Its current market yield is 7 percent and it is priced at par. If rates on comparable securities fall by more than 40 basis points (0.2 percent semiannually), the bond will be called.

Calculate the bond’s price if the market rate increases by 50 basis points (0.25 percent semiannually) using the present value formula from Chapter 6.

. Calculate the bond’s effective duration assuming a 50 basis point increase or decrease in market rates.

Calculate the bond’s price if the market rate increases by 50 basis points (0.25 percent semiannually) using the present value formula from Chapter 6.

. Calculate the bond’s effective duration assuming a 50 basis point increase or decrease in market rates.

## Answer to relevant Questions

A 5- year zero coupon bond and a 15- year zero coupon bond both carry a price of $ 7,500 and a market rate of 8 percent. Assuming that the market rates on both bonds fall to 7 percent, calculate the percentage change in each ...How does a futures contract differ from a forward contract? What features of interest rate swaps make them more or less attractive than financial futures as a risk management tool? In each of the following cases, indicate whether an interest rate cap, floor, collar, or reverse collar is an appropriate position for a hedge. Recommend a specific position. a. A bank loan customer wants to borrow at a ...Explain why cross hedges generally exhibit greater risk than hedges using a futures contract based on the underlying cash instrument hedged.Post your question

0