Note: If not otherwise stated, assume that:
⢠Yield-to-maturity (YTM) is an APR, semi-annuallycompounded
⢠Bonds have a face value of $1,000
⢠Coupon bonds make semi-annual coupon payments; however, couponrates (rc) are annual rates, i.e., bonds make a semi-annual couponpayment of rc/2
You must invest $100,000, and the bonds listed below from Ato E are the only investments available today (assume that it ispossible to buy a fraction of a bond in order to invest the full$100,000). The same 6% market interest rate (APR, compoundedsemi-annually) applies to all of these bonds and they have thefollowing additional characteristics:
A. 6 years to maturity and 4% coupon rate (coupons paidannually)
B. 3 years to maturity and 7% coupon rate (coupons paidsemi-annually)
C. 6 years to maturity and 0% coupon rate (discount orzero-coupon bond)
D. 3 years to maturity and 4% coupon rate (coupons paidsemi-annually)
E. 6 years to maturity and 4% coupon rate (coupons paidsemi-annually)
a) Rank these bonds according to their interest ratesensitivities, from the most interest rate sensitive to the leastinterest rate sensitive.
Select one:
ABCDE
CAEDB
CEABD
DBAEC
BDEAC
AECDB
EACBD
CDEAB
b) If you want to benefit from an unexpected decrease inmarket interest rates, which bond would you purchase?
Select one:
A
B
C
D
E
c) If you want to minimize interest rate risk, whichbond would you purchase?
Select one:
A
B
C
D
E
d) What is the duration (in years) of the bond you chosein part c)?
Select one:
0.32 years
2.76 years
2.84 years
5.68 years
5.52 years
2.34 years
1.98 years
3.96 years
NOTE: Please show all the work, without using excel (step bystep with equations) Thanks!
