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Bond Part New

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26 views2 pages

Bond Part New

Uploaded by

Ngọc Thảo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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EXERCISE FOR CHAPTER 7-9

Exercise 1:
Given a 7% coupon bond, maturity in 4 years, current price 935.5$.
a/ Define Macaulay duration of the bond?
b/ Define Modified duration of the bond?
c/ If interest rate increases by 300 bps, what is the new price of the bond based on
duration rule?

Exercise 2:
An investor is considering an investment to discount-bond Z which has 4 years to
maturity, expected rate of return is 7%.
a/ Define bond price
b/ Define Macaulay duration
c/ Define MOD
d/ Define convexity
e/ Define new price of the bond if interest rate increases by 100bps, using
duration rule and duration with convexity rule.
f/ What is the percentage errors for (e)?

Exercise 3:
ABC Co. issued a 30 years bond two years ago, coupon rate 7.5% semiannually. If
the bond was sold at 84% par value, what is the YTM?

Exercise 4:
An investor has USD 10 million and plans to invest during 2.5 years period in the
following bond portfolio.
- Bond A: Discount bond with 3 years to maturity.
- Bond B: 6% coupon bond, 2 years to maturity.
Current market interest rate is 10%. Please advise the investor to construct an
appropriate bond portfolio.

W: weight invest in bond A


1-W: weight invest in bond B
Price of bond A = $930.58
Dp= WxDA +(1-W)x DB
Exercise 5:

Exercise 6:
Bond A has 5% coupon rate, maturity is 10 years, YTM=7%
a. Find HPR for a year investment period if YTM is 6% in the end of year.
b. If you sell bond after 1 year, tax on interest income is 40% and tax rate on capital
gain is 30%. The bond is subject to original issue discount tax treatment.
c. What is after tax holding period return on the bond?
a.
P0 (5% coupon, n=10 years, YTM= 7%)=
P1 (5% coupon, n=9 years, YTM= 6%)=
HPR= (P1-P0+C)/P0=
b.
P0 (5% coupon, n=10 years, YTM= 7%)=
P1new (5% coupon, n=9 years, YTM= 7%)=

Total tax= ?

Tax on interest income (40%) include coupon payment and the difference between
P0 and P1new
Tax on capital gain(30%) the difference between P1 and P1new
Total tax=
c. After tax HPR=

Exercise 7:

The investor considers 3 bonds to invest in 1 year. All bonds have maturity in 8
years.
- Bond 1: zero coupon with F=1000 USD
- Bond 2: 7% coupon rate pay annually, F=1000 USD.
- Bond 3: 9% coupon rate pay annually, F=1000 USD.
a. If now three bonds are YTM=7%, what are the prices?
b. If you are expected YTM=7% at the beginning of next year, what will be the
price? What is your before tax holding period return on each bond? If tax is 30% on
ordinary income and 20% on capital income, what will your after tax rate of return
be on each?
c. Recalculate your answer with YTM=6% at the beginning of next year?

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