question archive You are an aggressive investor
You are an aggressive investor
Subject:FinancePrice: Bought3
You are an aggressive investor. The information for the bonds available on the market is as follows:
? Zero-coupon bond with 20 years left to maturity
? A 10%, 20-year annual bond has a Macaulay duration of 10.18 years.
Assume that the market interest rates are at 8 percent.
Required: a) Calculate these bonds value at the current market interest rates. State whether the price of the bonds is sold at a premium, at par, or at a discount. (6 marks)
b) Using present value method, calculate the price of these bonds in one year if the market interest rates drop to 6.5%. What are the price changes in percentage? (6 marks)
c) Using Modified duration, by what percentage will the bond prices change if market interest rates drop to 6.5%? (6 marks)
d) Explain the difference in answer in parts (b) and (c). (2 marks)
