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Consider the case in which an investor holds a bond for a period of time longer than the duration of the bond, that is, longer than the original investment horizon.
Show that if interest rates rise to 10 percent within the next year and your investment horizon is four years from today, you will still earn a 9 percent yield on your investment.
Calculate the duration of a two-year, $1,000 bond that pays an annual coupon of 10 percent and trades at a yield of 14 percent. What is the expected change in the price of the bond if interest rates d
You have discovered that the price of a bond rose from $975 to $995 when the yield to maturity fell from 9.75 percent to 9.25 percent. What is the duration of the bond?
How is duration related to the interest elasticity of a fixed-income security? What is the relationship between duration and the price of the fixed-income security?
You can obtain a loan for $100,000 at a rate of 10 percent for two years. You have a choice of paying the principal at the end of the second year or amortizing the loan that is, paying interest (10 pe
Maximum Pension Fund is attempting to balance one of the bond portfolios under its management. The fund has identified three bonds that have five year maturities and trade at a yield to maturity of 9
A six-year, $10,000 CD pays 6 percent interest annually and has a 6 percent yield to maturity. What is the duration of the CD? What would be the duration if interest were paid semiannually?
What conclusions can you reach about the relationship between duration and the time to maturity? Plot the relationship.
What is the duration of this loan? What is the duration of a five-year, $1,000 Treasury bond with a 10 percent semiannual coupon selling at par? Selling with a yield to maturity of 12 percent?
A one-year, $100,000 loan carries a coupon rate and a market interest rate of 12 percent. The loan requires payment of accrued interest and one-half of the principal at the end of six months. The rema
Two bonds are available for purchase in the financial markets. The first bond is a two-year, $1,000 bond that pays an annual coupon of 10 percent. The second bond is a two-year, $1,000 zero-coupon bon
What are the two different general interpretations of the concept of duration, and what is the technical definition of this term? How does duration differ from maturity?
What is the difference between book value accounting and market value accounting? How do interest rate changes affect the value of bank assets and liabilities under the two methods? What is marking to
The Wall Street Journal reports that the rate on three-year Treasury securities is 5.25 percent and the rate on four-year Treasury securities is 5.50 percent. The one-year interest rate expected in th
How does the liquidity premium theory of the term structure of interest rates differ from the unbiased expectations theory? In a normal economic environment
The Wall Street Journal reports that the rate on three-year Treasury securities is 5.60 percent and the rate on four-year Treasury securities is 5.65 percent. According to the unbiased expectations hy
A recent edition of The Wall Street Journal reported interest rates of 6 percent, 6.35 percent, 6.65 percent, and 6.75 percent for three-year, four-year, five-year
Using the unbiased expectations theory, calculate the current (long-term) rates for one-, two-, three-, and four-year-maturity Treasury securities. Plot the resulting yield curve.
Immediately prior to the beginning of year 2, LIBOR rates increase to 6 percent. What is the expected net interest income in year 2? What would be the effect on net interest income of a 2 percent decr
Scandia Bank has issued a one-year, $1 million CD paying 5.75 percent to fund a one-year loan paying an interest rate of 6 percent. The principal of the loan will be paid in two installments: $500,000
The current one-year Treasury bill rate is 5.2 percent, and the expected one year rate 12 months from now is 5.8 percent. According to the unbiased expectations theory
Explain the changes in the maturity values if the yields increase 1 percent. Assume that the insurance company has no other assets. What will be the effect on the market value of the company’s e
Does Consumer Bank face interest rate risk? That is, if market interest rates increase or decrease 1 percent, what happens to the value of the equity? How can a decrease in interest rates create inter
What is a maturity gap? How can the maturity model be used to immunize an FI"s portfolio? What is the critical requirement that allows maturity matching? to have some success in immunizing the balance