Which bond would you add to your portfolio and why? Coupon Time to Maturity Bond A 10%
Question:
- Which bond would you add to your portfolio and why?
Coupon | Time to Maturity | |
Bond A | 10% | 5 years |
Bond B | 10% | 4 years |
(B) Which bond would you add to your portfolio and why?
Coupon | Time to Maturity | |
Bond A | 0% | 4 years |
Bond B | 10% | 4 years |
(C) Below is a summary of a portfolio
Duration | Value of Bond | |
Bond E | 4.7 | $1,500,000.00 |
Bond F | 2 | $1,500,000.00 |
Bond G | 1.5 | $700,000.00 |
Total | 3 | $3,700,000.00 |
After reviewing the above portfolio Ann would like to increase the portfolio duration to 4. She has just received an additional $1,000,000.00 to spend, i.e., to make the portfolio value to $4,700,000.00.
- What is the duration of the bond that she needs to buy to increase the duration to 4?
- If only zero-coupon bonds are available, what is the maturity of the bond she should buy to make the duration equal to 4?
(D) One of Ann’s team members is not so sure about how to calculate the effect of changes in yield (market interest rates) and the effect on bonds. Ann, being an expert quickly volunteered to help. The following information was provided:
- Current price of bond: $1080
- The current yield to maturity: 8%
- Macaulay Duration(D): 6
- Semi-annual coupon payments
- What is the modified duration of the bond?
- What will be the estimated price of the bond if yields in the market fall by 0.75%?
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter