The yield curve is flat at 8%. You bought 100 bonds with a face value of $1, 000, an annual coupon of 6%, and maturity 4 years.

(a) Before doing any calculations, would you expect the bond to sell at a discount (price below face value) or at a premium (price face value)? Explain your reasoning.

(b) Calculate the price of this bond? What is the duration of this bond? What is the market value of our existing position of 100 such bonds?

(c) If you have access to 8-year zero coupon bonds (each of them with face value $1000), what is the market value of the position in the 8-year zero coupon bond that you should take to hedge the interest rate risk?

(d) How many such bonds should you buy or sell to hedge the interest rate risk?

Answer rating: 100% (QA)

a Before doing any calculations we can make an educated guess about whether the bond will sell at a discount or at a premium based on the relationship ... View the full answer