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Consider the following bonds with face values of $1,000

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Question;Consider;the following bonds with face values of $1,000. The coupon bonds make semi-annual coupon;payments;Issuer Years to;Maturity Coupon Price (% of FV);GAP;Inc. 7 5.95% 113.647;European;Investment Bank 7 2.50% 100.813;Raymond;James 10 5.95% 116.409;In;class, we calculated duration for a bond with semi-annual coupons. With semi-annual coupons, we transform;duration from years to semi-annual periods.;For example, if a bond with semi-annual coupons has a yield to maturity;of 2.48% and a duration of 1.956 years, we transform the duration to 1.956*2 =;3.912 semi-annual periods. Since the;semi-annual yield on the bond is 2.48/2 = 1.24%, modified duration, D* =;3.912/1.0124 = 3.864 semi-annual periods. Then, if the semi-annual yield rises;by 10 basis points, the change in the price of the bond is;-3.864*.001;= -.00386 = -.386%;Calculate;the yield to maturity, duration (in years), and modified duration (in;semi-annual periods) for each bond.Consider;the two bonds with the same maturity (7 years). What explains the different durations of;the 2 bonds? For each bond;consider a rise in semi-annual yields of 12 basis points. Using modified duration to estimate the;rate of capital loss, which bond has the highest rate of capital;loss? For each bond, consider a decline;in semi-annual yields of 12 basis points.;Using modified duration to estimate the rate of capital gain, which;bond has the highest rate of capital gain?;Consider;the bonds with the same coupon rate.;For each bond, consider an increase in semi-annual yields of 12;basis points. Using modified duration;to estimate the rate of capital loss, which bond has the highest rate of;capital loss? For each bond;consider a decrease in semi-annual yields of 12 basis points. Using modified duration to estimate the;rate of capital gain, which bond has the highest rate of capital gain?

 

Paper#50152 | Written in 18-Jul-2015

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