Consider the four bonds having annual payments as shown in the table below. They are each...

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Consider the four bonds having annual payments as shown in the table below. They are each priced to produce a 15% yield, compounded annually. End of year payments Bond A Year 1 100 Year 2 Year 3 100 100 + 1000 Bond B Bond C Bond D 50 0 0 + 1000 50 0 0 50+ 1000 0 + 1000 0 (a) Determined the price of each bond. (b) Determined the Macauley duration of each bond. (c) Which bond is most sensitive to a change in yield? (d) Suppose you owe $2,000 at the end of 2 years. If VA, VB, Vc, and VD are the total values of bonds purchased of types A, B, C, and D, respectively, what are the two equations needed to specify the immunization of the $2,000 payment? (Do not solve.)] [2] (e) In order to immunize the portfolio, you decide to use bond C and one other bond. Which other bond should you choose? Find the amounts (in total value) of each of these to purchase. [2] (f) You decided in (e) to use bond C in the immunization. Would other choices, including perhaps a combination of bonds, lead to lower total cost? [2] [¹] [2] [1] Consider the four bonds having annual payments as shown in the table below. They are each priced to produce a 15% yield, compounded annually. End of year payments Bond A Year 1 100 Year 2 Year 3 100 100 + 1000 Bond B Bond C Bond D 50 0 0 + 1000 50 0 0 50+ 1000 0 + 1000 0 (a) Determined the price of each bond. (b) Determined the Macauley duration of each bond. (c) Which bond is most sensitive to a change in yield? (d) Suppose you owe $2,000 at the end of 2 years. If VA, VB, Vc, and VD are the total values of bonds purchased of types A, B, C, and D, respectively, what are the two equations needed to specify the immunization of the $2,000 payment? (Do not solve.)] [2] (e) In order to immunize the portfolio, you decide to use bond C and one other bond. Which other bond should you choose? Find the amounts (in total value) of each of these to purchase. [2] (f) You decided in (e) to use bond C in the immunization. Would other choices, including perhaps a combination of bonds, lead to lower total cost? [2] [¹] [2] [1]

Answer rating: 100% (QA)

a To determine the price of each bond we need to calculate the present value of the bonds cash flows considering a 15 yield compounded annually Bond A ... View the full answer