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Bonds: market effects on yield

Can you help me with my Finance Questions, particularly show me how to do Question 1A. 1C, 2A, 2C, 3, 4, 5A. 5C. I have included a word document to help explain the questions

PICK FOUR GOVERNMENT OF CANADA BONDS FROM THE GLOBE AND MAIL (26 Jan 2009 11:11 EST)

? PICK TWO BOND WITH IDENTICAL COUPONS BUT DIFFERENT MATURITY DATES
QUES. Issuer
Bond Type
Series Coupon Rate
Coupon Freq.
Maturity
Price
Yield
Yield Type
Duration
Sector Code

A CANADA FEDGOV 4.00 S 2017/06/01 110.06 2.65 M 7.10 CAN
B CANADA FEDGOV 4.00 S 2016/06/01 110.29 2.46 M 6.37 CAN

? AND TWO BONDS WITH IDENTICAL MATURITIES BUT DIFFERENT COUPPON RATES

QUES. Issuer
Bond Type
Series
Coupon Rate
Coupon Freq.
Maturity
Price
Yield
Yield Type
Duration
Sector Code

C CANADA FEDGOV 3.75 S 2012/06/01 106.80 1.65 M 3.14 CAN
D CANADA DEDGOV 5.25 S 2012/06/01 111.66 1.65 M 3.08 CAN

NOTE THE CURRENT PRICE, MATURITY, AND COUPON RATE OF EACH.

NOW SUPPOSE THAT THE YIELD TO MATURITY INCREASES BY ONE PERCENTAGE POINT FOR EACH BOND (E.G. FROM 4% TO 5%).

1. CALCULATE THE PRICE OF EACH BOND BASED ON THE YIELDS PROVIDED IN THE NEWSPAPER.
A.
B.
C.
D.

2. RECALCULATE THE PRICE OF EACH BOND USING THE INCREASED YIELDS.
A.
B.
C.
D.

3. ARE LONG MATURITY OR SHORT MATURITY BONDS MORE AFFECTED BY THE YIELD INCREASE?

4. ARE HIGH-COUPON OR LOW-COUPON BONDS MORE AFFECTED BY THE YIELD INCREASE?

5. CALCULATE THE DURATION FOR EACH OF THESE BOND.
A.
B.
C.
D.

Attachments

Solution Preview

3. ARE LONG MATURITY OR SHORT MATURITY BONDS MORE AFFECTED BY THE YIELD INCREASE

The longer the maturity of a debt instrument, the more risk involved. With more risk, an investor wants a higher yield for tying up capital. Because future projections become more and more uncertain as the time period increases, the yield would fluctuate. Think of it as a risk premium. It then follows that a longer period of time (long maturity bonds) will create more uncertainly. Yields will then fluctuate because of the unknowns, and also because of the fickle nature of the financial markets (which relates to the unknown future, as well).

During periods of economic expansion, investors worry about being locked into low rates; therefore, they want a higher yield than a short-term investor could demand. Increases in yield will point to a better economy in the future. Long term investors would be inclined to settle for lower yields only when ...

Solution Summary

The solution explains the natures of financial markets in their perception of bond yields over long and short maturities. The second part of the 602 word explanation deals with yield changes on high or low coupon bonds (meaning if the stated rate is above or below market rates).

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