2. Consider the following 3 se
2. Consider the following 3 semiannual bonds with par$1,000:
Bond A: 5-year bond with coupon rate 6%
Bond B: 10-year bond with coupon rate 6%
Bond C: 10-year bond with coupon rate 10%
Step 1: (1.5 points)Calculate the prices of Bond A, Bond B, and Bond C based on therequired yield=7%.Bond A =Bond B =Bond C =
Step 2: (3 points)For each bond (Bond A, Bond B, or Bond C), conduct a scenarioanalysis through “Data Table” to report the bond’s price at yields3.5%, 4%, 4.5%, 5%, 5.5%, 6%, 6.5%, 7%,7.5%, 8%, 8.5%, 9%, 9.5%,and 10%.
Step 3: (1.5 points)Setting the case at yield 7% as the benchmark (P0case). Calculate the dollar price change for each bond at each newyield level following the formula:Dollar Price Change=Pt–P0
Step 4: (1.5 points)(1) Select a case to verify: For a given term to maturity andinitial yield, the higher the coupon rate, the higher the dollarprice change.(2) Select a case to verify: For a given coupon rate and initialyield, the longer the term to maturity, the higher the dollar pricechange.
Step 5: (2 points)Setting the case at yield 7% as the benchmark (P0case). Calculate the relative price change for each bond at eachnew yield level following the formula:Relative Price Change=(Pt–P0)/P0
Step 6: (1.5 points)(1) Select a case to verify: For a given term to maturity andinitial yield, the higher the coupon rate, the lower the relativeprice change.(2) Select a case to verify: For a given coupon rate and initialyield, the longer the term to maturity, the higher the relativeprice change.
Answer:
Price of Bond = Coupon1 / (1 + YTM)1 +Coupon2 / (1 + YTM)2 + …… +(Couponn + Face Value) / (1 + YTM)n
Step 41) Compare Bond B and Bond C, both have the same maturity, however,Bond C has a higher Coupon Rate.We can see that as the yield changes, the Dollar prices of the bondC changes at higher rate as compared to Bond B
2) Compare Bond A and Bond B, both have the same coupon rate,however, Bond B has longer maturity.We can see that as the yield changes, the dollar prices of Bond Bchanges at higher rate as compared to that of Bond A
Step 61) Compare Bond B and Bond C, both have the same maturity, however,Bond C has a higher Coupon Rate.We can see that as the yield changes, the relative prices of thebond C changes at lower rate as compared to Bond B.
2) Compare Bond A and Bond B, both have the same coupon rate,however, Bond B has longer maturity.We can see that as the yield changes, the relative prices of Bond Bchanges at higher rate as compared to that of Bond A.
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