Consider the following three bonds: Bond 1 Bond 2 Bond 3 

 

(a) Calculate and interpret the present values of each bond. 

(b) Calculate the Macaulay duration and Modified duration for each bond. Interpret your results. 

(c) If required yield rises from 5% to 5.8%, 

     (i) use duration to calculate the price changes for each bond, 

    (ii) explain whether these calculated price changes are precise, and 

    (iii) discuss the action that a bond portfolio manager should take in this situation

 

Transcribed Image Text:

Par Value Coupon Bond 1 Bond 2 Bond 3 10,000 7% 10,000 0% 10,000 5% Time to Maturity 4 years 6 years 3 years Required Yield 5% 5% 5% Par Value Coupon Bond 1 Bond 2 Bond 3 10,000 7% 10,000 0% 10,000 5% Time to Maturity 4 years 6 years 3 years Required Yield 5% 5% 5%

Answer rating: 100% (QA)

To calculate and interpret the present values of each bond we need the formula for present value which is Present Value Coupon Payment 1 Required Yiel... View the full answer