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What is interest rate risk

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1) What is interest rate risk? Which bond has greater interest rate risk, a 10-year zero-coupon Treasury STRIPS or a 10-year Treasury Note?

2) What is the difference between a bond's promised yield and its realized yield? Which is more relevant? When we calculate a bond's yield to maturity, which of these are we calculating?

3) Rolling Company bonds have a coupon rate of 4.50 percent, 12 years to maturity, and a current price of $1,235.47. What is the YTM? The current yield?

4) Atlantis Fisheries has issued a zero-coupon bond at a price of $500 per bond. Each bond has a face value of $1,000 at maturity in 20 years. If these zero-coupon bonds are callable in 15 years at a call price of $700, what is their yield to call?

5) Suppose the yield to maturity on a 3.0% coupon bond is 2.25%. The bond has a face value of $1,000, pays coupons semi-annually, and has a Macaulay duration of 12.34 years. Its price is 1,095.03. What is this bond's modified duration?

Now suppose the yield to maturity on this bond increases to 2.75%. Approximately what will be the percentage increase in the bond's price? Approximately what will the new price of the bond be? (Its actual new price would be $1,030.56).

What is the source of the error in this estimate?

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Reference no: EM132657512

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