On January 1, 2016, Jennifer Baker started to work as an intern in the fixed-income department of the Traveler Mutual Funds. Her supervisor, Linda Brown, assigned her to analyze interest rate risk associated with investment in bonds issued by DTE Energy.

Ms. Brown provided Jennifer with the information about four bonds issued by DTE Energy.

1. Calculate the yield to maturity for the four bonds on January 1, 2016, respectively.

2. Based on the macroeconomic data released by the National Bureau of Economic Research, Ms. Brown expected that inflation rate will increase by 1%. Hence, she expected that yield to maturity for the four bonds will increase by 1% too. She asked Jennifer to calculate prices of the four bonds if the yield to maturity increases by 1%, respectively.

3. List the bond prices of the four bonds on January 1, 2016 and the bond prices of the four bonds calculated in 2) when the yield to maturity increases by 1% in a table. Jennifer next calculated the percentage price change of the four bonds.

4. Since Bond A and Bond B have the same coupon rates, Ms. Brown asked Jennifer to compare which bond price will drop more when the yield to maturity increases by 1%? Since Bond C and Bond D have the same maturity date, Ms. Brown asked Jennifer to compare which bond price will drop more when the yield to maturity increases by 1%?

5. Based on the results in 1) through 4), Jennifer needed to report to Linda Brown about which bonds have higher interest rate risk and why
 

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Price on January 1, 2016 Bond A 123 Annual coupon rate Maturity date Par value Bond B 125 A 5.8% 12/31/2040 $1,000 Coupon payment frequency Semiannual Rating Then, Ms. Brown assigned Jennifer to do the following research jobs based on the information: 5.8% 12/31/2036 $1,000 Semiannual Bond C 101 A 1.625% 12/31/2017 $1,000 Semiannual Bond D 103 A 5.4% 12/31/2017 $1,000 Semiannual A Price on January 1, 2016 Bond A 123 Annual coupon rate Maturity date Par value Bond B 125 A 5.8% 12/31/2040 $1,000 Coupon payment frequency Semiannual Rating Then, Ms. Brown assigned Jennifer to do the following research jobs based on the information: 5.8% 12/31/2036 $1,000 Semiannual Bond C 101 A 1.625% 12/31/2017 $1,000 Semiannual Bond D 103 A 5.4% 12/31/2017 $1,000 Semiannual A

Answer rating: 100% (QA)

Coupon NPER PV FV Yieldsemi annual Yield annual Price on January 1 2016 Annual coupon ... View the full answer