Purchase Solution

Bond Price Movement and Interest Rate Risk

Not what you're looking for?

Ask Custom Question

1) Bond Price Movements. Bond X is a premium bond making annual payments. The bond pays 9 percent coupon, has a YTM of 7 percent, and also has a 13 years to maturity. Bond Y is a discount bond making annual payments. This bond pays a 5 percent coupon , has YTM of 7 percent, and also has 13 years to maturity. What are the prices of these bonds today? If interest rates remain unchanged, what do you expect the prices of these bonds to be in one year? In three years? In eight years? In 12 years? In 13 years? Whats going on here? Illustrate answer by graphing bond prices versus time to maturity.

2) interest Rate Risk. Bond J is a 4 percent coupon. Bond S is a 14 percent coupon bond. Both bonds have eight years to maturity, make semiannual payments, and have a YTM of 9 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? If interest rates suddenly fall by 2 percent instead? What does this problem tell you about the interest rate risk of lower-coupon bonds?

Purchase this Solution

Solution Summary

Answers to 2 questions on Bond Price Movement and Interest Rate Risk.
1) Calculates prices of two bonds that pay different coupon rates but the same YTM and the same number of years to maturity
2) Calculates the % change in prices of 2 bonds that pay different coupon rates when the interest rate changes.

Purchase this Solution

Free BrainMass Quizzes
Marketing Management Philosophies Quiz

A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.