What is the approximate percent change in price of bond

Assignment Help Financial Management

Reference no: EM131536969

Immunization

Your company has just built and patented a laser defense system and is planning on installing the equipment in various locations around the country. To finance the installations, you, the CFO, have borrowed $1 billion, which your company will need to repay in five years. The market interest rate is 8%, so the present value of this obligation is $680,583,197. You decide to fund the obligation using three-year zero-coupon bonds and perpetuities that make annual coupon payments.

1. How can you immunize the obligation? (Here, you need to construct an immunized portfolio that consists of the zero-coupon bonds and the perpetuities.)

2. Now suppose that one year has passed and that the market rate is still 8%. You need to ensure that the obligation is still fully-funded and immunized. Is the obligation still fully-funded and immunized? If not, what do you need to do to fully fund and immunized the obligation?

Duration

1. What is the duration of a 10-year, 6% bond if the market rate on bonds of similar quality is 5.8%?

2. Now suppose that the yield to maturity has changed to 5.81%. Using Macaulay duration, what is the approximate percent change in the price of the bond? (You do not need to recalculate Macaulay duration using 5.81%. Use the duration value that you found in Problem 1.)

3. Using convexity, what is the approximate percent change in the price of the bond?

Reference no: EM131536969

Questions Cloud

Relationship between the sales price and quantity sold : The curve that shows the relationship between the sales price and quantity sold is called the:

Explain the relationship among inflation and interest rates : Explain the relationship among Inflation, Interest Rates, and Exchange Rates.

Foreign exchange rates change : explain how you can hedge against losing money (as foreign exchange rates change). USD loses value against your assigned currency,

Make money using covered interest rate arbitrage : You are trying to make money using covered interest rate arbitrage.

What is the approximate percent change in price of bond : How can you immunize the obligation? what is the approximate percent change in the price of the bond?

Net present value and internal rate of return : Net Present Value and Internal Rate of Return Companies use capital investment analysis to evaluate long-term investments.

Markup percentage on variable cost : The variable cost per unit is $450, then the markup percentage on variable cost would be,

Relationships between capital costs and leverage as measured : Graph(a) the relationships between capital costs and leverage as measured by D/V and (b) the relationship between V and D.

What is easy jets weighted average cost of capital : what is easy Jets's weighted average cost of capital Show workings and formulas.

User Account

All Pages