Question: Duration problem I A bond makes annual coupon payments at rate 5 % , there are three remaining coupon payments, and yield to maturity is

Duration problem I
A bond makes annual coupon payments at rate 5%, there are three remaining coupon
payments, and yield to maturity is 8%.
(a) What is duration of the bond?
(b) Suppose the yield suddenly drops to 6%. How large is the change in the bond price
according to duration?
Duration problem II
Consider a perpetuity with annual coupon rate C=50.
(a) If the interest rate is 5%, what is the bond price?
(b) What is duration at 5% interest?
(c) If the interest rate increases by one percentage point (from 5% to 6%), exactly how
large is the change in the bond price?
(d) If the interest rate increases by one percentage point (from 5% to 6%), how large is
the change in the bond price using duration to approximate the price change?
Duration problem I A bond makes annual coupon payments at rate

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Q:

5. For each of the following assets, state whether the asset is tangible/ intangible property, personal/real property, and depreciable/nondepreciable property. a. A cell phone tower. b. A plot of...

Q:

Could you explain why this answer is correct? Problem: A particular bond makes annual coupon payments worth 6.5% of its $1,000 face value. The yield to maturity on this bond is currently 5%, which is...

Q:

A bond makes annual coupon payments a t rate 5 % , there are three remaining coupon payments, and yield t o maturity i s 8 % . ( a ) What i s duration o f the bond? ( b ) Suppose the yield suddenly...

Q:

A). [Excel] Demonstrate in the Excel Spreadsheet that a 6% coupon bond with three years until maturity has a duration of 2.8334. The bond makes annual coupon payments and has a yield to maturity of...

Q:

You purchase a 20-year bond today with a $10,000 face value that makes annual coupon payments at a 5% coupon rate. (a) If the yield to maturity on 20 year bonds at the time of purchase was 4%, how...

Q:

A particular bond makes annual coupon payments worth 6 . 5 % of its $ 1 , 0 0 0 face value. The yield to maturity on this bond is currently 5 % , which is unchanged from a year ago ( that is , the...

Q:

A particular bond makes annual coupon payments worth 6 . 5 % of its $ 1 , 0 0 0 face value. The yield to maturity on this bond is currently 5 % , which is unchanged from a year ago ( that is , the...

Q:

A bond makes annual coupon payments at a 5% coupon rate, has 5 years until maturity, and is currently trading at 96. If the yield to maturity on the bond remains unchanged over the next year, what...

Q:

A bond makes annual coupon payments at a 5% coupon rate, has 5 years until maturity, and is currently trading at 96 . If the yield to maturity on the bond remains unchanged over the next year, what...

Q:

A bond makes annual coupon payments, has an annual coupon rate of 11 percent , a maturity of 20 years, and a face value of $1,000. The market further believes that the yield to maturity (YTM) for...

Q:

Please show all steps, if done in excel that would be preferred. Thank you. 10. Suppose that a bond makes annual coupon payments at a 7% coupon rate, has 10 years until maturity, and is currently...

Q:

Identify several factors that influence the choice between a push and a pull strategy.

Q:

Dene the following terms in relationship to ratio analysis: (a) Liquidity. (b) Leverage. (c) Activity. (d) Protability. (e) Market strength. What ratios are used to measure each category?

Q:

Student loans, auto loans, and credit card loans are: less risky than Treasury bills. assets for households. components of the S

Q:

Scenario: A Multi-national Corporation called The Globe has created a subsidiary called Thirst in an under-developed country called non-potable waters. This hosting country suffers from a severe...

Q:

(Appendices) ENDING INVENTORY, COST OF GOODS SOLD, AND GROSS MARGIN. Wilson Company sells a single product. At the beginning of the year, Wilson had 120 units in stock at a cost of $8 each. During...

Q:

(Appendices) SALES RETURNS. Swan and Bloom, Inc., is a wholesaler of novelty items to small stores. All sales are on credit with no discount offered. During March, Swan and Bloom accepted the...

Q:

(Appendices) INTERNAL CONTROL FOR SALES. Alcoa Building Products distributes aluminum siding and related building products to building contractors, all of whom purchase on credit. LO6 REQUIRED: List...