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Unformatted text preview: FNAN 301, Spring 2010, quiz 3, solutions C onceptual: effect of YTM changes on value: direction and magnitude for different maturities 1. Georgetown Inc. and Fairfax Inc. have each issued a bond that just paid a coupon and pays its next semiannual coupon in 6 months. The two firms’ bonds have the same face value and fixed annual coupon rate. At 11:59 a.m. this morning, both bonds had the same yieldtomaturity (YTM). At noon today, the YTMs of the two bonds changed by 1 percentage point, but the YTMs of the two bonds were still identical to each other after the change. If the price of both bonds increased immediately after today’s change in YTM and the price of the Georgetown bond increased by less (in percentage terms) than the price of the Fairfax bond increased immediately after today’s change in YTM, then which one of the following assertions could be true? Assume that the face value, coupon rate, and YTM of the bonds are always positive. A. The YTM of both bonds increased by 1 percentage point, the Georgetown bond matures in 4 years, and the Fairfax bond matures in 12 years B. The YTM of both bonds increased by 1 percentage point, the Georgetown bond matures in 12 years, and the Fairfax bond matures in 4 years C. The YTM of both bonds decreased by 1 percentage point, the Georgetown bond matures in 4 years, and the Fairfax bond matures in 12 years D. The YTM of both bonds decreased by 1 percentage point, the Georgetown bond matures in 12 years, and the Fairfax bond matures in 4 years E. None of the above assertions could be true 1. Georgetown Inc. and Fairfax Inc. have each issued a bond that just paid a coupon and pays its next semiannual coupon in 6 months. The two firms’ bonds have the same face value and fixed annual coupon rate. At 11:59 a.m. this morning, both bonds had the same yieldtomaturity (YTM). At noon today, the YTMs of the two bonds changed by 1 percentage point, but the YTMs of the two bonds were still identical to each other after the change. If the price of both bonds decreased immediately after today’s change in YTM and the price of the Georgetown bond decreased by less (in percentage terms) than the price of the Fairfax bond decreased immediately after today’s change in YTM, then which one of the following assertions could be true? Assume that the face value, coupon rate, and YTM of the bonds are always positive. A. The YTM of both bonds increased by 1 percentage point, the Georgetown bond matures in 4 years, and the Fairfax bond matures in 12 years B. The YTM of both bonds increased by 1 percentage point, the Georgetown bond matures in 12 years, and the Fairfax bond matures in 4 years C. The YTM of both bonds decreased by 1 percentage point, the Georgetown bond matures in 4 years, and the Fairfax bond matures in 12 years D. The YTM of both bonds decreased by 1 percentage point, the Georgetown bond matures in 12 years, and the Fairfax bond matures in 4 years E. None of the above assertions could be true 1 FNAN 301, Spring 2010, quiz 3, solutions...
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 Spring '09
 MURRAY
 Dividend yield, YTM, Percentage point, Georgetown bond

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