help in homework

New User?

Fill This Form To Receive Instant Help

Help in Homework
trustpilot ratings
google ratings


Homework answers / question archive / 1) Your company owns the following bonds: Bond Market Value Duration A $13 million 2 B $18 million 4 ? $20 million 3 If general interest rates decrease from 8

1) Your company owns the following bonds: Bond Market Value Duration A $13 million 2 B $18 million 4 ? $20 million 3 If general interest rates decrease from 8

Finance

1) Your company owns the following bonds: Bond Market Value Duration A $13 million 2 B $18 million 4 ? $20 million 3 If general interest rates decrease from 8.5% to 8%, what is the approximate change in the $ value of the portfolio? You must show your calculation, otherwise, your mark will be deducted.

2)An investor has the following two options: a) To buy a two-year $1,000 zero-coupon bond at a market price of $860, or. b) To buy a two-year $1,000 bond with an annual interest of 3% at a market price of $900. Assuming annual coupon payments, which option do you think the investor should choose? Explain why. You must show your calculation, otherwise, your mark will be deducted.

pur-new-sol

Purchase A New Answer

Custom new solution created by our subject matter experts

GET A QUOTE

Answer Preview

1)

Answer : Duration of Portfolio = Sum of [Weights * Duration]

= [2 * (13 / 13+18+20)] + [4 * (18 / 13+18+20)] + [3 * (20 / 13+18+20)]

= 0.51 + 1.41 + 1.18

= 3.09803921566 or 3.09

Change in Value = - Duration * [Change in Interest Rate / (1 + Intrest Rate)] * Total Market Value of Bond A,B &C

= -3.09 * [(0.085 - 0.085) / (1 + 0.08)] * 51 million

= -3.09 * [0.005 / 1.08] * 51 million

= 729,583

2)

BOND WITH PV =900 , COUPON =3% IS BETTER

a)

YTM = (FV / PV)1/N - 1

FV = 1000

PV = 860

N = 2

YTM = (1000 / 860)1/2 - 1

=1.07832 - 1

= 7.83%

b)

YTM = (C +(F -P / N)) / (F+P)/2

C =30

F =1000

P =900

N = 2

YTM = (30 + (1000 -900 / 2)) / (1000 + 900 / 2)  

= 80 / 950

= 8.42%

option of coupon with Yield to maturity of 8.42% is better since zero coupon bond yields only 7.83%

Sitejabber (5.0)

BBC (5.0)

Trustpilot (4.9)

Google (5.0)