Calculate the duration gap at the time of purchase.

Assignment Help Financial Management
Reference no: EM131956692

An investor plans to retire in 10 years. As part of the retirement portfolio, the investor buys a newly issued, 12-year, 8% annual coupon payment bond. The bond is purchased at par value, so its yield-to- maturity is 8.00% stated as an effective annual rate.

-Calculate the approximate Macaulay duration for the bond, using a 1 bp (0.01%) increase and decrease in the yield-to-maturity and calculating the new prices per 100 of par value to six decimal places.

-Calculate the duration gap at the time of purchase.

-Does this bond at purchase entail the risk of higher or lower interest rates?

Reference no: EM131956692

Questions Cloud

Can a supply chain be a competitive advantage : Can a supply chain be a competitive advantage? As an example, The Home Depot or Walmart?
What required rate of return would result in a price : If McCracken expects both earnings and dividends to grow at an annual rate of 12%, what required rate of return would result in a price per share of $22?
Will your hedging strategy in part a eliminate all risk : Can this risk be hedged using standardized futures contracts? If so, how? B. Will your hedging strategy in Part A eliminate all risk? Why or why not?
How much total interest is earned on original deposit : Consider a $1,800 deposit earning 8 percent interest per year for five years. Find How much total interest is earned on the original deposit?
Calculate the duration gap at the time of purchase. : Calculate the duration gap at the time of purchase. Does this bond at purchase entail the risk of higher or lower interest rates?
Tuckman group development model : Tuckman's Group Development Model is discussed. Think of a small group you have been a part of.
How much was withdrawn at each withdrawal point : how much was withdrawn at each withdrawal point?
How much will you have in ten years : When you receive it, you will invest it for seven more years at 9.00 percent per year. Required: How much will you have in ten years?
Evaluate the maximum profit and loss for this position : An investor purchases a stock for $38 and a put for $.50 with a strike price of $35. The investor sells a call for $.50 with a strike price of $40.

Reviews

Write a Review

Financial Management Questions & Answers

  Arbitrage opportunity with options you are studying

You are in a situation that you suspect there is an arbitrage opportunity with options you are studying.

  Which product is financially preferable

Suppose we can create two products: A and B; A and B are mutually exclusive to each other. The price of both products is $4 in real terms. The Sales Volume for product A is 5 million units yearly, and for product B is 10 million yearly. Which product..

  What is the present value of the interest tax shield

If a firm permanently borrows $100 million at an interest rate of 8%, what is the present value of the interest tax shield? (Assume that the marginal corporate tax rate is 30%.)

  Pretax cost of debt and aftertax cost of debt

Drogo, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 16 years to maturity that is quoted at 105 percent of face value. The issue makes semiannual payments and has an embedded cost of 10 percent annually. Wh..

  Using the arithmetic average growth rate in dividends

Suppose Stark Ltd. just issued a dividend of $2.24 per share on its common stock. The company paid dividends of $1.80, $1.98, $2.05, and $2.16 per share in the last four years. If the stock currently sells for $45, what is your best estimate of the c..

  Calculate the WACC and the value of the firm

Hose plc presently has a capital structure which is 30% debt and 70% equity. The cost of debt before taxes is 8% and for equity 15%. The firm's future cash flows, after tax but before interest, are expected to be perpetuity of €650.000. Calculate the..

  Financial markets are in pricing financial securities

Discuss how efficient the U.S. financial markets are in pricing financial securities.

  Alternative strategy to cover the risk of loss for producer

Propose an alternative strategy to cover the risk of loss for the producer and the user of the Copper, but this time using Options.

  Share of nondividend-paying stock

You own one share of a nondividend-paying stock. how much do you now pay your broker?

  What is the after tax cost of capital to walgreen for bonds

The Walgreen Corporation is contemplating a new investment that it plans to finance using one-third debt. The firm can sell new $1000 par value bonds with a 15 year maturity at a price of $946 that carries a coupon interest rate of 12.3 percent that ..

  What is the cost of this strategy

Construct a synthetic long put strategy with strike price $40 and what is the cost of this strategy?

  Option is in the money as long as option price is positive

A problem with swaps is the lack of standardized contracts, which limits the development of a secondary market. Paying executives with stock options encourages them to take less risk. Risk management makes sense for firms directly engaged in activiti..

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd