Question

2. Carter Bank makes a 3-year loan for $1,000 with an annual coupon rate of 8%....

2. Carter Bank makes a 3-year loan for $1,000 with an annual coupon rate of 8%.

a. Compute the annual coupon bond payment of a U.S. Treasury bond with a risk-free rate of 8%.

b. Suppose the spot rate for 3-year Treasury bonds increases to 9%, find the duration and use it to explain what happens to the present value of the bond in part a. SHOW YOUR WORK.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

2. a.

Annual coupon payment = coupon rate x face value of the bond = 8% x 1,000 = $80

b.

When the spot rate is 9%,

Present value of the bond PV = PMT x [1 - (1 +y)-n ] / y + FV / (1 + y)n = 80 x (1 - 1.09-3) / 0.09 + 1000 / 1.093 = $974.69

When spot rate is 8%, PV- = 80 x (1 - 1.08-3) / 0.08 + 1000 / 1.083 = $1,000

When spot rate is 10%, PV+ = 80 x (1 - 1.1-3) / 0.1 + 1000 / 1.13 = 950.26

Duration of bond = (PV- - PV+) / (2 x PV x (y+ - y-)) = 49.74 / ( 2 x 974.69 x 0.02) = 1.26

This means that a 1% change in yields would inversely change the price of the bond by 1.26% (1% increase in rates will cause a 1.26% decrease in prices)

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
2. Carter Bank makes a 3-year loan for $1,000 with an annual coupon rate of 8%....
2. Carter Bank makes a 3-year loan for $1,000 with an annual coupon rate of 8%. Suppose Carter Bank lends to Alex at a 10% annual coupon, which is 2% above the Treasury risk-free rate. Name an embedded borrower risk that Carter may have included in the mark-up above the initial risk-free rate, and suggest an approach that it could have used to price that embedded risk.
a) First, consider a 10 year bond with a coupon rate of 7% and annual coupon...
a) First, consider a 10 year bond with a coupon rate of 7% and annual coupon payments. Draw a graph showing the relationship between the price and the interest on this bond. The price should be on the y- axis and the interest rate on the x-axis. To compute the various prices, consider interest rates between 2% and 12% (use 0.5% increments). So your x-axis should go from 2%, then 2.5% ... until 11.5% and then 12%. Is the relationship...
A 30-year Treasury bond is issued with a face value of $1,000 and makes coupon payments...
A 30-year Treasury bond is issued with a face value of $1,000 and makes coupon payments of $20 every six months. If relevant market yields decrease shortly after the Treasury bond is issued, what happens to the bond’s coupon rate, current yield, and yield to maturity? all three increase all three decrease. the coupon rate increases, the current yield increases, and the yield to maturity decreases. the coupon rate stays the same, the current yield decreases, and the yield to...
1. A 3-year annual coupon bond has a yield to maturity of 8%, coupon rate of...
1. A 3-year annual coupon bond has a yield to maturity of 8%, coupon rate of 5%. The face value of the bond is $1,000. a. What is the price of the bond? Is it premium bond or discount bond? b. Suppose one year later immediately after you receive the first coupon payment, the yield to maturity drops to 7%. What would be your holding period return if you decide to sell the bond at the market price then? c....
#1. Expected Rate of Return: Par Value : $1,000 Coupon Rate : 8% Maturity period :...
#1. Expected Rate of Return: 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. # 2 : Duration 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...
Suppose the price of a 1-year 5%-coupon bond is $1,000 and the price of a 2-year...
Suppose the price of a 1-year 5%-coupon bond is $1,000 and the price of a 2-year 5%-coupon bond is $1027.81. Using bootstrapping, what is the two-year zero-coupon spot rate? Each bond has a face value of $1,000 and makes annual coupon payments.
A U.S. Government​ T-Note with a​ 3-year maturity has a coupon rate of 5​% and a...
A U.S. Government​ T-Note with a​ 3-year maturity has a coupon rate of 5​% and a face value of ​$1,000.  The coupons are paid annually and the next coupon is due in one year. Using the Treasury spot rates given in the table​ below, what is the price of the coupon​ bond? (Round to nearest cent.) Treasury Spot Rates Term Rate t=1 9.55​% t=2 5.42​% t=3 3.78​%
Fares makes 7 annual end-of-year payments of $13,000 each on a loan with a market rate...
Fares makes 7 annual end-of-year payments of $13,000 each on a loan with a market rate of 6%. If annual inflation is 3%, what would be the equivalent annual payment in constant dollars? Hint: compute the present value of the 7 annual payments first.
A bank makes a loan of 20,000 at an interest rate of i. The loan will...
A bank makes a loan of 20,000 at an interest rate of i. The loan will be repaid with level payments at the end of each year for 20 years. When the bank receives each payment, it reinvests at a rate of 5%. At the end of the 20 year period, the bank calculates the annual effective return over the loan period to be 6.5%. What is i, the original interest rate on the loan?
1. Analyze the 20-year, 8% coupon rate (Semi-annual payment), $1,000 par value bond. The bond currently...
1. Analyze the 20-year, 8% coupon rate (Semi-annual payment), $1,000 par value bond. The bond currently sells for $1,218. What's the bond's yield to maturity? A. 5.06% B. 5.68% C. 5.38% D. 6.10% 2. Analyze the 20-year, 8% coupon rate (Semi-annual payment), $1,000 par value bond. The bond currently sells for $1,218. What's the bond's current yield, and capital gain yield? (Please show your work) A. 6.57%, -0.47% B. 6.07%, -0.69% C. 6.57%, -0.47% D. 6.07%, 0.69%
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT