Chapter 6 and duration (1)

Chapter 6 and duration (1) - Homework problems Chapter 6...

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Homework problems Chapter 6 and Duration 1. Current spot rates for US Treasury bonds are given below. Calculate the yield to maturity for a $1000 3 year US Treasury note paying 4% annual coupons. The redemption value and par value both equal $1000. Term Spot rate 1 year 3.5% 2 year 4.0% 3 year 4.5% 2. Discuss what it means for a bond to trade as follows: -At Par -At a premium -At a discount 3. If a bond is callable, who controls the option to call or not call the bond? Therefore, under what conditions is a callable bond likely to be called? 4. On Jan. 1, 2008 XYZ Corp issues a 10 year $1000 bond with 6% coupons paid semiannually. The bond is callable after 4 years at face value. It is now Dec. 30, 2011, so the bond is callable essentially immediately. The 6 year interest rate is 6.50%, and the 5 year interest rate is 5.5%. Calculate the price of the bond assuming it is called and assuming it is not called. If the corporation calls the bond and issues a new 6 year bond on the call date, it would raise the cost of its borrowing, so it is not likely to do that. Even so, why might investors think this bond may be called? How would that affect the price of the bond? 5. What is the measure of the percentage change in the price of a bond for small changes in interest rates called?
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6. What are the 3 caveats or shortcomings of using Modified Duration to estimate the change in price of a bond (or a portfolio of bonds) for a change in interest rates?
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