Ans_Problem_Set_9__09

Ans_Problem_Set_9__09 - Princeton University Department of...

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Princeton University Department of Economics Economics 362 Fall Term 2009 Answers to Problem Set 9 1. The percentage bond price change will be: decline. 3.27% a or 0327 . 10 . 1 005 . 194 . 7 y 1 y Duration - = × - = + × - 2. Computation of duration: a) YTM = 6% (1) (2) (3) (4) (5) Time Until Payment Payment Weight of each Column (1) x Payment Discounted at 6% Payment Column (4) (in years) 1 60 56.60 .0566 .0566 2 60 53.40 .0534 .1068 3 1060 890 .00 .8900 2 .6700 1000.00 1.0000 2.8334 Duration = 2.833 years b) YTM = 10% (1) (2) (3) (4) (5) Time Until Payment Payment Weight of each Column (1) x Payment Discounted at 6% Payment Column (4) (in years) 1 60 54.55 .0606 .0606 2 60 49.59 .0551 .1102 3 1060 796 .39 .8844 2 .6532 900.53 1.0000 2.8240 Duration = 2.824 years, which is less than the duration at the YTM of 6%. 1
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3. For a semiannual 6% coupon bond selling at par, we use parameters c=3% per half- year period, y=3%, T=6 semiannual periods. Using Rule 8, we find that: D = (1.03/.03) [1 – (1/1.03)
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This note was uploaded on 01/15/2011 for the course ECO 362 at Princeton.

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Ans_Problem_Set_9__09 - Princeton University Department of...

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