quiz2 - AP/ADMS 4540 Financial Management Fall 2011...

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AP/ADMS 4540 Financial Management Fall 2011 Instructor: Dr. William Lim Quiz 2 (Section A) Calculate the duration and volatility of a 5-year, $1,000 face value, 14 percent coupon bond yielding 13 percent with coupons paid annually. What are the Weighted Values in each year? Using the concepts of duration and volatility, calculate what happens to the price of the bond when the yield to maturity rises to 14 percent. Answer: Time Payment PV RV WV 1 140 123.89 0.11968 0.11968 2 140 109.64 0.10591 0.21182 3 140 97.03 0.09373 0.28119 4 140 85.86 0.08294 0.33176 5 1,140 618.75 0.59774 2.98870 Bond Price =1,035.17 1.00000 3.93315=Duration (6 marks for duration & table) Duration = D = 3.93315 years ) Volatility = v = -D/(1+r) = -3.93315/1.13 = -3.48% ) (2 marks for volatility) When yield rises by one percent, price falls by 3.48% or $36.02 New price = $1,035.17-$36.02 = $999.15. (2 marks for new price)
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AP/ADMS 4540 Financial Management Fall 2011 Instructor: Dr. William Lim Quiz 2 (Section B) RWJR is considering whether to refund an old issue of $30 million, 12 percent coupon
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This note was uploaded on 11/10/2011 for the course ADMS ADMS 4540 taught by Professor Lie during the Spring '11 term at York University.

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quiz2 - AP/ADMS 4540 Financial Management Fall 2011...

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