Question: A two-year bond with par value $1,000 making annual coupon payments of $100 is priced at $1,000. What is the yield to maturity of the bond? What will be the realized compound yield to maturity if the one-year interest rate next year turns out to be:
( a ) 8%,
( b ) 10%,
( c ) 12%?
The bond is selling at par value.
Its yield to maturity equals the coupon rate, 10%.
If the first-year coupon is reinvested at an interest rate of r percent, then total proceeds at the end (1 + r) + 1100].
Therefore, realized compound yield to maturity of the second year will be a function of r as given below:
Realized YTM = √Proceeds / 1000 -1
√1208/1000 - 1 = 0.0991 = 9.91 %
√1210/1000 - 1 = 0.1000 = 10.00 %
√1212/1000 - 1 = 0.1009 = 10.09 %
Question: A newly issued 10-year maturity, 4% coupon bond making annual coupon payments is sold to the public at a price of $800. What will be an investor’s taxable income from the bond over the coming year? The bond will not be sold at the end of the year. The bond is treated as an original-issue discount bond.
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.
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