4. (14 points) You are trying to compare the interest rate risks of two bonds: (i)...

  

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4. (14 points) You are trying to compare the interest rate risks of two bonds: (i) an 8-year 8% bond, and (ii) an 8-year bond that pays 6% for the first four years and 10% for the last four years. Both bonds pay semi-annual interest payments. The current market interest rate for both bonds is 7%. (a) (6 points) Determine the (Macaulay) durations of the two bonds. Show your work. (b) (3 points) Determine the modified durations of the two bonds. Show your work. (c) (2 points) Based on your findings in (a) and (b), which bond has a greater interest rate risk? Explain. (d) (3 points) Using the results from (b), determine the dollar change in the values of the two bonds if the market interest rate decreases from 7% to 7.1%. 4. (14 points) You are trying to compare the interest rate risks of two bonds: (i) an 8-year 8% bond, and (ii) an 8-year bond that pays 6% for the first four years and 10% for the last four years. Both bonds pay semi-annual interest payments. The current market interest rate for both bonds is 7%. (a) (6 points) Determine the (Macaulay) durations of the two bonds. Show your work. (b) (3 points) Determine the modified durations of the two bonds. Show your work. (c) (2 points) Based on your findings in (a) and (b), which bond has a greater interest rate risk? Explain. (d) (3 points) Using the results from (b), determine the dollar change in the values of the two bonds if the market interest rate decreases from 7% to 7.1%.

Answer rating: 100% (QA)

a Macaulay Durations Macaulay Duration is a measure of the weighted average time it takes to receive ... View the full answer