3) Consider a three-year maturity, 8 percent annual coupon bond selling at par of $1,000. a)...

 

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3) Consider a three-year maturity, 8 percent annual coupon bond selling at par of $1,000. a) What is the Macaulay Duration, Modified Duration, and Dollar Duration of the bond? (3 points) b) If interest rates increase by 30 basis points, what is the approximate change in the market price of the bond? (2 points) c) Suppose an investor purchased the bond at issuance and sold it at time t, which is shorter than the Macaulay Duration. Let us assume an immediate increase in market interest rate right after she purchased the bond, and the new interest rate persists throughout her holding period. Does this change in interest rate increase or decrease her total cash inflows from this investment? Qualitatively explain why. (3 points) 3) Consider a three-year maturity, 8 percent annual coupon bond selling at par of $1,000. a) What is the Macaulay Duration, Modified Duration, and Dollar Duration of the bond? (3 points) b) If interest rates increase by 30 basis points, what is the approximate change in the market price of the bond? (2 points) c) Suppose an investor purchased the bond at issuance and sold it at time t, which is shorter than the Macaulay Duration. Let us assume an immediate increase in market interest rate right after she purchased the bond, and the new interest rate persists throughout her holding period. Does this change in interest rate increase or decrease her total cash inflows from this investment? Qualitatively explain why. (3 points)

Answer rating: 100% (QA)

Bond Duration and Price Sensitivity 3a Bond Duration Macaulay Duration Formula Present Value of Cash... View the full answer