Question 1) An investor has two bonds in his or her portfolio, Bond C and Bond Z each matures in 4 yrs, has a face value of $1,000, and has a yield to maturity of 9.6 %. Bond C pays a 10%percent annual coupon, while Bond Z is a zero coupon bond.
a. Assuming that the yield to maturity of each bond remains at 9.6% over the next 4 years, calculate the price of the bonds at the following years to maturity and fill in the following table:
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Yr to maturity
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Price of Bond C
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Price of Bond Z
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4
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3
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2
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1
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0
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b. Plot the time path of prices for each bond.
Question 2) Interest rate sensitivity: An investor purchased the following 5 bonds. Each of them had an 8 % yield to maturity on the purchase day. Immediate after she purchased them, interest rate fell and each then had a new YTM of 7 percent. What is the percentage change in price for each bond after the decline in interest rates? Fill in the following table:
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Price @ 8%
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Price 7%
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Percentage change
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10-yr,10% annual coupon
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10-year zero
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5-year zero
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30-year zero
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$100 perpetuity
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