Reference no: EM133089839
The following table contains information of several corporate bonds.
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Bond Rating
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YTM
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Bond A
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15 years; 6% annual coupon
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--
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4 %
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Bond B
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20 years; 7% annual coupon
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--
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10 %
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Bond C
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10 years; 5% annual coupon
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AA-rated
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--
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Bond D
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10 years; 5% annual coupon
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B rated
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--
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Bond E
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30 years; 4% annual coupon
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--
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--
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a) What is the effective duration (ED) of Bond A for a 100bp (50+/50-) change in yield?
b) If you expect the interest rate to drop by 60bp, what is the percentage change in the price of Bond A as estimated by effective duration?
c) If the interest rate rises, will the actual price of Bond B be higher or lower than the estimated price based on duration approximation? ONLY brief verbal explanation is required.
d) Assume Bond C and Bond D are identical except for their bond ratings. Without any calculation, determine which bond should you purchase (Bond C or Bond D) now if you expect the interest rate to go down in the coming period. Explain briefly.
e) Without any calculation, determine which of the five bonds in the table has the highest interest rate risk. Explain briefly.
f) If the YTM of Bond E remains unchanged in the coming year, how will its effective duration change one year from today? Explain briefly.