ric_ps2solution

# ric_ps2solution - Riccardo Colacito Division of Finance...

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Unformatted text preview: Riccardo Colacito Division of Finance Problem Set 2 Investments Answer key 1. (a) Construct a table of cash flows, their present values, and the weight that should be attach to each date: Time Cash flow Present Value weight 1 49 46.34 0.049 2 49 43.82 0.046 3 49 41.43 0.044 4 49 39.18 0.041 5 49 37.05 0.039 6 49 35.04 0.037 7 49 33.13 0.035 8 1049 670.71 0.708 Price 946.69 The duration on a semiannual basis is simply: D s = 8 X t =1 t × weight t = 6 . 76 The duration in years is D = D s 2 = 3 . 38 (b) The modified duration is D * = D 1 + y = 3 . 38 1 . 115 = 3 . 035 (c) The estimated percentage change is Δ P P =- D * × Δ y =- 3 . 035 × (11 . 65%- 11 . 50%) =- . 455% 1 (d) The new price of the bond can be computed from Δ P P = P 1- P P =- . 455% which implies P 1 = (1- . 0455) × P = (1- . 00455) × \$946 . 69 = \$942 . 38 2. (a) Construct tables of cash flows, their present values, and the weight that should be attach to each date for each bond....
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ric_ps2solution - Riccardo Colacito Division of Finance...

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