A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $800, what will be the approximate capital gain yield of this bond over the next year if its yield to maturity remains unchanged?
The capital gain yield will be $11.70
PV = $-800
FV = $1000
PMT = 80
t = 9
Yield To Maturity = (Face Value/Current Bond Price)^(1/Years To Maturity)−1
= (1000 / 800) )^(1/9)−1
PV = -800
FV = $1000
PMT = 80
t = 9
i = 11.46%
The current yield = 80 / 800 = 10%
YTM = Current yield + Capital gain yield
11.46 = 10 + Capital gain yield
Capital gain = 1.46% of PV
New price = $811.70
Thus capital gain yield = $811.70 - $800
= $ 11.70
The ability to immunize a bond portfolio is very desirable for bond portfolio managers in some instances.
a. Discuss the components of interest rate risk—that is, assuming a change in interest rates over time, explain the two risks faced by the holder of a bond.
b. Define immunization and discuss why a bond manager would immunize his or her portfolio.
c. Explain why a duration-matching strategy is a superior technique to a maturity matching strategy for the minimization of interest rate risk.
You are managing a portfolio of $1 million. Your target duration is ten years, and you can choose from two bonds: a zero-coupon bond with a maturity of 5 years and an infinity, each yielding 5%.
An a. How much of each bond will you hold in your portfolio?
b. How will these fractions change next year if the target duration is nine years?
a. Which set of conditions will result in a bond with the greatest price volatility?
(1) A high coupon and short maturity.
(2) A high coupon and a long maturity.
(3) A low coupon and a short maturity.
(4) A low coupon and a long maturity.
b. An investor who expects declining interest rates would be likely to purchase a bond that has a _____________ coupon and a _____________ term to maturity.
(1) Low, long
(2) High, short
(3) High, long
(4) Zero, long
c. With a zero-coupon bond:
(1) Duration equals the weighted-average term to maturity.
(2) Term to maturity equals duration.
(3) Weighted-average term to maturity equals the term to maturity.
(4) All of the above.
d. As compared with bonds selling at par, deep discount bonds will have:
(1) Greater reinvestment risk.
(2) Greater price volatility.
(3) Less call protection.
(4) None of the above.
94% of StudySmarter users get better grades.Sign up for free