rps5c_10

rps5c_10 - Chapter 5c Recommended End-of-Chapter Problems...

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Chapter 5c Recommended End-of-Chapter Problems and Solutions 9. Calculate the duration of a $1,000 4-year bond with an 8% coupon (annual payments) that is currently selling at par. Assume the length of each discount period is 1 year. The following grid is useful for the duration calculation: ________________________________________________________________ 1 2 3 4 PV at Market Period Cash Flows Rate of 8% 1 x 3 1 $80 $ 74.07 $ 74.07 2 $80 $ 68.59 $ 137.18 3 $80 $ 63.81 $ 190.53 4 $1,080 $ 793.83 $3,175.32 Price = $1,000.00 $3,577.10 Early cash flows (high reinvestment risk) will be weighted at a low value, thus lowering duration. If the bond is held 3.577 years, the investor will earn the yield to maturity, 8%. If held to maturity, price risk is eliminated, but realized yield will be higher/lower than 8% depending on reinvestment rates. 12. Calculate the duration for a $1000, 4-year bond with a 4.5% annual coupon, currently selling at par. Use the duration to estimate the percentage change in the bond’s price for a
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This note was uploaded on 06/06/2011 for the course FINA 4000 taught by Professor Staff during the Spring '08 term at UGA.

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rps5c_10 - Chapter 5c Recommended End-of-Chapter Problems...

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