Question: 8) Numerical application for the bonds defined in question 6 above. An investor considers putting 1,000,000 $ in one of the following 6 bonds:
8) Numerical application for the bonds defined in question 6 above. An investor considers putting 1,000,000 $ in one of the following 6 bonds: - Bond A: Coupon c-5.0%, life span n-10 years Bond B: Coupon c-5.0%, life span n-15 years Bond C: Coupon c-3.5%, life span n-10 years Bond D: Coupon c-3.5%, life span n=15 years Bond E: Coupon c-0.0%, life span n-10 years Bond F: Coupon c 0.0%, life span n-15 years We provide below the unit prices of these bonds for different values of the interest rate r between 3.3% and 5.5%, as obtained by applying the formula found in question 5 above: B D 0.035 1.12475 1.17276 1.00000 1.00000 0.70892 0.59689 0.036 1.11585 1.16010 0.99173 0.98956 0.70211 0.58831 0.037 1.10703 1.14762 0.98353 0.97729 0.69536 0.57985 0.038 1.09831 1.13531 0.97542 0.96617 0.68869 0.57153 0.039 1.08967 1.12316 0.96739 0.95521 0.68209 0.56334 0.040 1.08111 1.11118 0,95945 0.94441 0.67556 0.55526 0.041 1.07264 1.09937 0.95158 0.93375 0.66910 0.54732 0.042 1.06425 1.08772 0.94378 0.92325 0.66271 0.53949 0.043 1.05594 1,07622 0.93607 0.91289 0.65638 0.53178 0.044 1.04771 1.06488 0.92843 0.90268 0.65012 0.52419 0.51692 0.50936 0.50211 0.49497 0.045 1.03956 1.05370 0.92087 0.89260 0.64393 0.046 1.03150 1.04266 0.91339 0.88267 0.63780 0.047 1.02351 1.03178 0.90597 0.87288 0.63173 0.048 1.01559 1.02104 0.89864 0.86322 0.62573 0.049 1.00776 1.01045 0.89137 0.85370 0.61979 0.48794 0.050 1.00000 1.00000 0.88417 0.84431 0.61391 0.48102 0.051 0.99232 0.98969 0.87705 0.83504 0.60810 0.47420 0.052 0.98471 0.97952 0.87000 0.82591 0.60234 0.46748 We assume that the current value of the interest rate r is 4.3%. If the investor puts the entirety of his 1,000,000 $ in one of these bonds, which one should he select if following his purchase, the interest rate were to vary slightly, say move from 4.3% to 4.2%? What would be the profit or loss in each case?
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Solution With an interest rate of 43 here are the unit prices and potential profitloss for each bond ... View full answer
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