1 (a) Determine the approximate percentage change in
price for a bond whose coupon rate changes from 10% to 12% if the
duration is -6.76%.
(b) What would be the new price if the old price was GHS5.78?
2. A 10-year, 7% coupon
bond with a face value of $1,000 is currently selling for $871.65.
Compute your rate of return if you sell the bond next year for
3. One-year interest rate over the next five years are
expected to be 15%, 16%, 17%, 18% and 19%.
i. Determine the interest rate on one to five-year bonds today.
ii. investors have preference for holding short-term bonds so their liquidity premium for holding one-to five-year bonds are 0%, 0.25%, 0.50%, 0.75% and 1%. Determine the interest rate on one to five-year bonds today.
a) Determination of change in price
Step 1: Calculation of Modified Duration
Modified Duration = Duration / (1+Yield To Maturity)
= -6.76 / 1.1
*Since YTM is not provided in question, current interest rate is taken as YTM.
Step 1: Calculation of percentage change in price
Percentage change in price = Modified Duration * percentage change in YTM
= -6.15 * (12%-10%)
= -6.15 * 2
(b) Calculation of new price
Old price = 5.78
New price = 5.78 + 5.78 * 12.30%
*In this case bond have negative duration. That means the direction of change in interest rate and bond price is same. When interest rate increases, price also increases and vice-versa.
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