rps5c_10

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

This preview shows pages 1–2. Sign up to view the full content.

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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 06/06/2011 for the course FINA 4000 taught by Professor Staff during the Spring '08 term at UGA.

### Page1 / 3

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

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online