Once upon a time, the treasurer of Mighty Corporation (MCO) decided to issue a bond (hereafter: The
Fantastic news! We've Found the answer you've been seeking!
Question:
Once upon a time, the treasurer of "Mighty Corporation" (MCO) decided to issue a bond (hereafter:The bond)The bondwould have a 8-year life and promised that the holder of the bond would receive:
- 8 annual payments of $50,
- Along with the 8thpayment, MCO promised to return the principal of $1,000.
Question #1:
- A) On the day it is issued, what is the Coupon Yield? 5%
- B) On the day it is issued, what is the Yield-to-Maturity (YTM)?
- C) Calculate the Macaulay duration of the bond. Show your work on the "Duration".
Off to the Insurance Company: Using Duration to Immunize
Question #2:
The bond is bought by an insurance company. One year passes, the bond has made its first coupon payment, so it is effectively a 7 year bond. The interest rate/yield-to-maturity on the bond falls to 3%.
- A) What is the Coupon Yield on the bond?
- B) What is the price of the bond?
Question #3:
The insurance company wants to use The Bond as part of a portfolio designed to "immunize" an obligation that it foresees will come due in 10 years. (Hint: Example 11.2 in the book is very useful here).
- To create a bond portfolio with an overall duration of 10 years, the insurance company decides to buy zero coupon bonds with a maturity of 20 years (and with a YTM of 7%) to combine with The Bond . To bring the combination of The Bond plus The Zero to a combined portfolio duration of 15 years, what would be the correct mix of The Bond relative to the 20-year Zero?
- A) percentage amount of The Bond in the portfolio
- B) percentage amount of The Zero in the portfolio
- C) Can you suggest a simpler investment that would give the insurance company a bond investment with a 10year duration?
Related Book For
Posted Date: