Question: Consider a bond with a settlement date of February 22, 2012, and a maturity date of March 15, 2020. The coupon rate is 5.5%. If the yield to maturity of the bond is 5.34% (bond equivalent yield, semi-annual compounding), what is the list price of the bond on the settlement date? What is the accrued interest on the bond? What is the invoice price of the bond?
List price = 101.71
Accrued interest = 0.6391
Invoice price = 101.349
Semi annual coupon rate = 5.5%
Semi-annual yield to maturity rate = 5.34 %
The semi-annual coupon = 5.34 % x face value = 5.5% x 100 = 5.5
C = 5.5
YTM / 2 = 0.534
t = 8
F = 100
The list price is the sale price divided by the difference of 1 minus the result of discount divided by 100.
L = S / (1 – D/100)
List price of Bond = 101.71
The formulae for accrued income = (accrued interest rate / 2 ) x ( days between ask price date and last interest payment / coupon period ) x ask price
= 5.5% x (21/ 182 ) x 100.71
Hence accrued interest = 0.6391
Invoice price = Ask price + Accrued income
= 100.71 + 0.6391 = 101.349
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.
a. Janet Meer is a fixed-income portfolio manager. Noting that the current shape of the yield curve is flat, she considers the purchase of a newly issued, option-free corporate bond priced at par; the bond is described in Table 11.9. Calculate the duration of the bond.
Meer is also considering the purchase of a second newly issued, option-free corporate bond, which is described in Table 11.10. She wants to evaluate this second bond’s price sensitivity to an instantaneous, downward parallel shift in the yield curve of 200 basis points. Estimate the total percentage price change for the bond if the yield curve experiences an instantaneous, downward parallel shift of 200 basis points.
Question: A newly issued bond pays its coupons once a year. Its coupon rate is 5%, its maturity is 20 years, and its yield to maturity is 8%.
a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 7% by the end of the year.
b. If you sell the bond after one year when its yield is 7%, what taxes will you owe if the tax rate on interest income is 40% and the tax rate on capital gains income is 30%? The bond is subject to original-issue discount (OID) tax treatment.
c. What is the after-tax holding-period return on the bond?
d. Find the realized compound yield before taxes for a two-year holding period, assuming that (i) you sell the bond after two years, (ii) the bond yield is 7% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 3% interest rate.
e. Use the tax rates in part ( b ) to compute the after-tax two-year realized compound yield. Remember to take account of OID tax rules.
94% of StudySmarter users get better grades.Sign up for free