Question

Problem 5-16
A. Interest Rate Sensitivity

A bond trader purchased each of the following bonds at a yield to maturity of 10%. Immediately after she purchased the bonds, interest rates fell to 6%. What is the percentage change in the price of each bond after the decline in interest rates? Assume annual coupons and annual compounding. Fill in the following table. Do not round intermediate calculations. Round your answers to two decimal places.

	Price @ 10%	Price @ 6%	Percentage Change
10-year, 10% annual coupon	$	$	%
10-year zero
5-year zero
30-year zero
Perpetuity, $100 annual coupon

B. Yield to Call, Yield to Maturity, and Market Rates

Absalom Motors' 14% coupon rate, semiannual payment, $1,000 par value bonds that mature in 25 years are callable 6 years from now at a price of $800. The bonds sell at a price of $1,150, and the yield curve is flat. Assuming that interest rates in the economy are expected to remain at their current level, what is the best estimate of the nominal interest rate on new bonds? Do not round intermediate calculations. Round your answer to two decimal places.

%

Answer 1

A.

B. Yield to Maturity

Excel Formula "RATE(50,-70,1150,-1000)" = 6.04% = Semi Annual Yield

Annual YTM = 12.09% (6.045% * 2)