(a) Explain in words the meaning of the phrase ‘one-year return’ on a bond Calculate the expected one year return on a 10-yr Government coupon bond (5% coupon rate) with a face value of $1000 if interest rates are 3% this year and are expected to fall to 2% next year.

(b) Calculate the expected one-year return on the same bond in (a) if interest rates rise to 3.5% instead of falling.

(c) What is meant by the phrase 'interest rate risk' as it applies to the bond market? Define the term. Which bond is subject 1o more interest rate risk a 5.yr Government bond or a 20-yr Government bond? Provide an explanation (in words) for your answer. The more complete the explanation, the higher the grade.

(d) Calculate and compare the · interest rate risk 'associated with a 5yr-Government coupon bond (4% coupon rate) and a 20-yr Government coupon bond (4% coupon rate). Both with a face value of$1000, if interest rates rise from5% this year to 6% next year. Explain your calculations.

Answer rating: 100% (QA)

a OneYear Return on a Bond The oneyear return on a bond refers to the total profit expressed as a percentage of the initial investment that you can ex... View the full answer