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Determine the yield to maturity on a ten-year

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Reference no: EM131209061

#1- Explain the calculations in each of the three panels below, one at a time. Explain the purpose of the calculation and the procedure of the calculation, i.e., how the data inputs determine the output - the result. Bond Questions Support Sheets.xlsx (posted on Bb assignment page) has ‘live' sheets so you can see how the calculations work.

 

buy at par

BOND CASH FLOWS

 

1994

1995

1996

1997

1998

Purchase Price

-1000



Interest

102.5

102.5

102.5

102.5

Sale Price



1000

Sum

-1000

102.5

102.5

102.5

1102.5

YTM

10.25%









buy at discount

BOND CASH FLOWS



1994

1995

1996

1997

1998

Purchase Price

-900



Interest

102.5

102.5

102.5

102.5

Sale Price



1000

Sum

-900

102.5

102.5

102.5

1102.5

YTM

13.66%









buy at premium

BOND CASH FLOWS



1994

1995

1996

1997

1998

Purchase Price

-1100



Interest

102.5

102.5

102.5

102.5

Sale Price



1000

Sum

-1100

102.5

102.5

102.5

1102.5

YTM

7.28%



 

#2- Explain the calculations in each of the two panels below, one at a time. As in #1, consider the inputs and output - the results. Then, explain the difference between the two panels. Use Bond Questions Support Sheets.xlsx, as for #1 above.

 

#3- Determine the yield to maturity on a 10-year 6% bond selling at par if the going rate (current interest rate for newly issued bonds of the same quality rating) is 6%? This is a think question; not a calculation question. Briefly explain how you reached your answer.

 

#4- If Treasury bonds are risk free, why is there a standard deviation around their mean rate of return? Refer to the table on page 17 of this PDF. HINT: Examine the blue treasury interest rate trend in the chart on page 4.

 

#5- Your pension fund has a sub-portfolio of bonds. The duration of this bond portfolio is 8 years. The current market value of the bond portfolio is $1,000,000. Calculate the price change expected on the bond portfolio if interest rates rise from their current level of 5% to 7%, and discuss whether or not this is an example of interest rate risk.

 

#6- Explain in one sentence why the duration on a zero coupon bond is equal to its maturity.

Reference no: EM131209061

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