Today is March1, 2006. Consider the following two (semi-annual coupon) bonds: Bond A Bond B Maturity DateMarch
Question:
Today is March1, 2006. Consider the following two (semi-annual coupon) bonds:
Bond A Bond BMaturity DateMarch 1, 2012March 1, 2013
Coupon Rate4%12%
Current Price$948.71 $1,273.01
(a)What is the YTM on each bond?
Assume that the YTM on Bond A changes to 6%:
(bi) What is the new price of Bond A?
(bii) What is the capital gain yield on Bond A?
Now Assume that the YTM on Bond A changes to 4%:
(biii) What is the new price of Bond A?
(biv) What is the capital gain yield on Bond A?
Assume that the YTM on Bond B changes to 8%:
(ci) What is the new price of Bond B?
(cii) What is the capital gain yield on Bond B?
Now Assume that the YTM on Bond B changes to 6%:
(ciii) What is the new price of Bond B?
(civ) What is the capital gain yield on Bond B?
(d) Which bond has more interest rate risk? How do you know?
(e) Which bond has the longer maturity?
(f) Is it always true that longer-term bonds have more interest rate risk?
Microeconomics
ISBN: 9781464146978
1st Edition
Authors: Austan Goolsbee, Steven Levitt, Chad Syverson