Consider the four bonds having annual payments as shown in the table below. They are each...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consider the four bonds having annual payments as shown in the table below. They are each priced to produce a 15% yield, compounded annually. End of year payments Bond A Year 1 100 Year 2 Year 3 100 100 + 1000 Bond B Bond C Bond D 50 0 0 + 1000 50 0 0 50+ 1000 0 + 1000 0 (a) Determined the price of each bond. (b) Determined the Macauley duration of each bond. (c) Which bond is most sensitive to a change in yield? (d) Suppose you owe $2,000 at the end of 2 years. If VA, VB, Vc, and VD are the total values of bonds purchased of types A, B, C, and D, respectively, what are the two equations needed to specify the immunization of the $2,000 payment? (Do not solve.)] [2] (e) In order to immunize the portfolio, you decide to use bond C and one other bond. Which other bond should you choose? Find the amounts (in total value) of each of these to purchase. [2] (f) You decided in (e) to use bond C in the immunization. Would other choices, including perhaps a combination of bonds, lead to lower total cost? [2] [¹] [2] [1] Consider the four bonds having annual payments as shown in the table below. They are each priced to produce a 15% yield, compounded annually. End of year payments Bond A Year 1 100 Year 2 Year 3 100 100 + 1000 Bond B Bond C Bond D 50 0 0 + 1000 50 0 0 50+ 1000 0 + 1000 0 (a) Determined the price of each bond. (b) Determined the Macauley duration of each bond. (c) Which bond is most sensitive to a change in yield? (d) Suppose you owe $2,000 at the end of 2 years. If VA, VB, Vc, and VD are the total values of bonds purchased of types A, B, C, and D, respectively, what are the two equations needed to specify the immunization of the $2,000 payment? (Do not solve.)] [2] (e) In order to immunize the portfolio, you decide to use bond C and one other bond. Which other bond should you choose? Find the amounts (in total value) of each of these to purchase. [2] (f) You decided in (e) to use bond C in the immunization. Would other choices, including perhaps a combination of bonds, lead to lower total cost? [2] [¹] [2] [1]
Expert Answer:
Answer rating: 100% (QA)
a To determine the price of each bond we need to calculate the present value of the bonds cash flows considering a 15 yield compounded annually Bond A ... View the full answer
Related Book For
Calculus And Its Applications
ISBN: 9780134437774
14th Edition
Authors: Larry Goldstein, David Lay, David Schneider, Nakhle Asmar
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
What do we really learn from studying how managers actually spend their time and their decision-making powers in like-for-like organisations in different countries? What are the messages for key...
-
A 4.5-Hz wave with an amplitude of 12 cm and a wavelength of 27 cm travels along a stretched horizontal string. (a) How far does a given peak on the wave travel in a time interval of 0.50 s? (b) How...
-
Maya is in her last year of high school. She earns $8 per hour working approximately 25 hours per week at the local grocery store. Approximately 30 percent of her salary is tax deductible. Maya also...
-
A shear layer between two fluids. Assume the following velocity distribution between two shear layers: \[v_{x}(y)=v_{0} \tanh (y / \delta)\] This is known as the Betchov and Criminale form. Calculate...
-
This problem continues Problem 8. Use the Access_Practice.accdb database that you have been working on to complete the following tasks. a. Go to the Relationships screen and connect the five tables,...
-
Consider a simple loan. Draw up a table that shows the present value (PV) given the following variables. Show all your calculations. < Present Value (PV) Cash Flow (CF) Interest Rate (i) Term (n)...
-
In the residential construction field what major changes in the strategic context of business do you expect in the coming 5 years? What kinds of career development might you undertake to help you...
-
nitrogen - 1 3 undergoing positron emission Express your answer as a nuclear equation.
-
create a mind map of how the various tyles of methods of calculating concentration. Include an example problem with solution and a practical situation in which is method may be required
-
Calculate the E cell and the direction of the following cell : Fe / Fe ^ 2 + / / Fe ^ 3 + ; Fe ^ 2 + / Pt With concentrations of : a ) 1 . 0 M b ) Fe / Fe ^ 2 + ( 0 . 5 M ) / / Fe ^ 3 + ( 0 . 1 M ) ;...
-
A certain liquid X has a normal freezing point of 4 . 2 0 \ deg C and a freezing point depression constant = Kf 4 . 9 7 \ deg C kgmol 1 . A solution is prepared by dissolving some ammonium sulfate (...
-
E Listen Acetaminophen, CgH9NO2, is a covalent compound and the active ingredient in several popular nonprescription pain medications, such as Tylenol. What is the molecular mass (amu or g/mol) for...
-
2) Vaughn Corporation issued $300,000 face value ten-year, 10% bonds on January 1, 2001, for $340,260. The bonds pay interest annually on January 1 and the effective interest rate is 8%. Show all of...
-
A bar of length = 1 has one fixed and one free end and stiffness function c(x) = 1 - x. Find the displacement when subjected to a unit force. Pay careful attention to the boundary condition at the...
-
A farmer has $1500 available to build an E-shaped fence along a straight river so as to create two identical rectangular pastures. (See Fig. 13.) The materials for the side parallel to the river cost...
-
Use logarithmic differentiation to differentiate the following functions. f(x) = e x (3x - 4) 8
-
Differentiate the functions in Exercises. y=(x+1)(x3+5x+2)
-
For each of the following sets of numbers, calculate a \(95 \%\) confidence interval for the mean ( \(\sigma\) known); before going through the steps in calculating the confidence interval, the...
-
Consider a 3 -year \(10 \%\) coupon bond. The underlying short rate of interest follows a lattice with initial value of \(R=1.15\) and then has an factor of 1.02 , a down factor of .99 , and...
-
Using the density function of the stopping time probability for a fixed \(\lambda\), find the average time to the first event over the entire interval \([0, \infty)\).
Study smarter with the SolutionInn App