Reference no: EM132671931

Problem 1: A 30-year Treasury bond is issued with face value of $1,000, paying interest of $60 per year. If market yields increase shortly after the T-bond is issued, what happens to the bond's:

a. coupon rate?

b. price?

c. yield to maturity?

d. current yield?

Problem 2: Suppose that you buy a TIPS (inflation-indexed) bond with a 1-year maturity and a coupon of 4% paid annually. If you buy the bond at its face value, and the inflation rate is 8%:

a. What will be your cash flow at the end of the year?

b. What will be your real return?

c. What will be your nominal return?

Problem 3: Consider two bonds, a 3-year bond paying an annual coupon of 5% and a 10-year bond also with an annual coupon of 5%. Both currently sell at face value. Now suppose that interest rates rise to 10%.

a. What is the new price of the 3-year bonds?

b. What is the new price of the 10-year bonds?

c. Do you conclude that long-term or short-term bonds are more sensitive to a change in interest rates?

Problem 4: Suppose interest rates increase from 8% to 9%. Which bond will suffer the greater percentage decline in price: a 30-year bond paying annual coupons of 8% or a 30-year zero-coupon bond?