1. Ted owns a bond which is callable in 2.5 years. The bond has a 6 percent coupon, pays interest...

Question:

1. Ted owns a bond which is callable in 2.5 years. The bond has a 6 percent coupon, pays interest semiannually, has a par value of $1,000, and has a yield to call of 6.3 percent. What is the call premium if the bond currently sells for$1,044.54?

Hint: Call premium is the difference between call price and par value.

A. $50 B.$60

C. $70 D.$75

E. $80 2. Cochran's Furniture Outlet is issuing 25-year, 9 percent callable bonds. These bonds are callable in 4 years with a call premium of$45. The bonds are being issued at par and pay interest semi-annually.

What is the yield to call?

A. 9.94 percent

B. 10.72 percent

C. 11.00 percent

D. 11.47 percent

E. 12.08 percent

3. A 6 percent, semiannual coupon bond has a yield to maturity of 7.4 percent and a Macaulay duration of 5.7. The bond has a modified duration of _ and will have a _ percentage increase in price in response to a 25 basis point decrease in the yield to maturity.

A. 5.4829; 1.35

B. 5.4966; 1.32

C. 5.4966; 1.37

D. 5.3073; 1.33

E. 5.3073; 1.38

Modified Duration:

The market interest rates and price of the bond are inversely co-related in the sense that when interest rates rise, bond prices fall, and when interest rates fall, bond price rises. Modified duration is based on this concept where it measures the change in the value of a bond in response to the change in the market interest rates.

In other words, a Modified duration shows the bond price's sensitivity to changes in the interest rates.

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1.

To calculate the call premium, with below-given details:

• Type of coupon=semiannual coupon bond
• Par Value = \$1,000
• Callable years = 2.5 years...

Interest Rate Risk: Definition, Formula & Models

from

Chapter 3 / Lesson 6
11K

Interest rate risk is really the risk of two different events (price reduction and reinvestment rate reduction) caused by a change in interest rates. Interest rate risk affects bond investments, but the good news for bond investors is that it can be mitigated or eliminated.