You must invest $100,000, and the bonds listed below from A to E are the only investments available today (assume that it is possible to buy a fraction of a bond in order to invest the full $100,000). The same 6% market interest rate (APR, compounded semi-annually) applies to all of these bonds and they have the following additional characteristics:

3 years to maturity and 8% coupon rate (coupons paid semi-annually).

5 years to maturity and 6% coupon rate (coupons paid annually).

5 years to maturity and 6% coupon rate (coupons paid semi-annually).

5 years to maturity and 0% coupon rate (zero-coupon bond).

3 years to maturity and 6% coupon rate (coupons paid semi-annually).

 

a) Rank these bonds according to their interest rate sensitivities, from the most interest rate sensitive to the leastinterest rate sensitive?

b) If you are worried that market interest rates might increase unexpectedly, which bond should you purchase?

c) What is the duration of the bond you selected in?

d) If you want to profit from an unexpected decrease in market interest rates, which bond should you purchase?

Answer rating: 100% (QA)

To rank the bonds according to their interest rate sensitivities we need to consider their durations ... View the full answer