Question

Consider two Treasury bonds. Both of them have face value of
$1,000 and have four years to maturity, with
**annual** coupon payments. The first bond is a
zero-coupon bond and the second bond has 5% coupon rate. The yield
is 6% today. Which of the following statements about interest rate
risk and duration is **false**?

Group of answer choices

A. The duration of the zero-coupon bond is four years.

B. The duration of the 5%-coupon bond is larger than the zero-coupon bond.

C. If the yield suddenly drops by 1%, the capital gains from the zero-coupon bond is more than the 5%-coupon bond.

Answer #1

The duration of a zero coupon bond is always equal to its maturity, as the payment isn't made until maturity

The duration of a coupon bond will always be smaller than the zero-coupon bond.

We have found out the duration of the 5% coupon bond as shown in the below table:

time(t) |
cash flow(CF) |
PV factor |
PV of CF |
(PV/total)*t |

1 | 50 | 1.06 | 47.16981 | 0.048862967 |

2 | 50 | 1.1236 | 44.49982 | 0.092194277 |

3 | 50 | 1.191016 | 41.98096 | 0.1304636 |

4 | 1050 | 1.262477 | 831.6983 | 3.446208294 |

Total | 965.3489 | 3.717729137 |

Here it is found that the duration is 3.71 which is less than 4 years

When the yield drops the capital gains for a coupon bond will always be more than the zero coupon bond

So the correct choice is

**B. The duration of the 5%-coupon bond is larger than the
zero-coupon bond.**

Consider two bonds: bond XY and bond ZW . Bond XY has a face
value of $1,000 and 10 years to maturity and has just been issued
at par. It bears the current market interest rate of 7% (i.e. this
is the yield to maturity for this bond). Bond ZW was issued 5 years
ago when interest rates were much higher. Bond ZW has face value of
$1,000 and pays a 13% coupon rate. When issued, this bond had a...

Consider two bonds: bond XY and bond ZW . Bond XY has a face
value of $1,000 and 10 years to maturity and has just been issued
at par. It bears the current market interest rate of 7% (i.e. this
is the yield to maturity for this bond). Bond ZW was issued 5 years
ago when interest rates were much higher. Bond ZW has face value of
$1,000 and pays a 13% coupon rate. When issued, this bond had a...

A)
As with most bonds, consider a bond with a face value of $1,000.
The bond's maturity is 22 years, the coupon rate is 12% paid
annually, and the discount rate is 12%.
What is this bond's coupon payment?
B)
A bond offers a coupon rate of 14%, paid semiannually, and has a
maturity of 6 years. Face value is $1,000. If the current market
yield is 5%, what should be the price of this bond?

a. Several years ago, Castles in the Sand Inc. issued bonds at
face value of $1,000 at a yield to maturity of 6%. Now, with 6
years left until the maturity of the bonds, the company has run
into hard times and the yield to maturity on the bonds has
increased to 11%. What is the price of the bond now? (Assume
semiannual coupon payments.)
b. Suppose that investors believe that Castles
can make good on the promised coupon payments...

7.
A) As with most bonds, consider a bond with a face value of
$1,000. The bond's maturity is 27 years, the coupon rate is 14%
paid annually, and the market yield (discount rate) is 5%. What
should be the estimated value of this bond in one year? Assume the
market yield remains unchanged. Enter your answer in terms of
dollars, rounded to the nearest cent.
B) As with most bonds, consider a bond with a face value of
$1,000....

a. Several years ago, Castles in the Sand Inc. issued bonds at
face value of $1,000 at a yield to maturity of 5%. Now, with 5
years left until the maturity of the bonds, the company has run
into hard times and the yield to maturity on the bonds has
increased to 10%. What is the price of the bond now? (Assume
semiannual coupon payments.) (Do not round intermediate
calculations. Round your answer to 2 decimal places.)
b. Suppose that...

Consider the following prices of zero coupon bonds, each with a
face value of $1,000, for different maturities:
Maturity
Price
1
962
2
925
3
889
Consider a bond with maturity of 3 years, a coupon rate of 5%
and face value of $1,000. What is the price of this bond?

Par Value : $1,000
Coupon Rate : 8%
Maturity period : 5 Years
Market Price : 1,110
Instructions: Please using Trial and Error to find the expected
rate of return with PVIFA and PVIF Table and the Duration with the
following information:
Duration of a zero-coupon bond equals its maturity. It is only
for zero-coupon bonds that duration and maturity are equal. Indeed,
for any bond that pays some cash flows prior to maturity, its
duration will always be less...

a. Several years ago, Castles in the Sand Inc. issued bonds at
face value of $1,000 at a yield to maturity of 6%. Now, with 6
years left until the maturity of the bonds, the company has run
into hard times and the yield to maturity on the bonds has
increased to 11%. What is the price of the bond now? (Assume
semiannual coupon payments.) (Do not round intermediate
calculations. Round your answer to 2 decimal places.)
Bond Price:
b....

You own two bonds that both have R1000 face values. Bond A has a
coupon rate of 7%, 3 years to maturity and a yield to maturity of
10%. Bond B has a coupon rate of 8%, 7 years to maturity and a
yield to maturity of 9%. Calculate the duration of your bond
portfolio (Bond A and B combined).

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