1. Yield and Frequency
Consider a 5 year bond with face value of 100 and price of 101 that has a coupon of 6% . What is the yield of this bond if the coupon is paid?
a. Annually
b. Semi-Annually
c. Quarterly
d. Suppose the yield increases by 100 bps, what is the new bond price for the above three cases
e. Suppose the yield decreases by 100 bps, what is the new bond price for the above three cases
f. Is the magnitude of increase and decrease in price for 100 bps change in yield the same?
2. Yield and Economics of Bond
Consider bonds A and B that mature in 5 years and have the same credit quality. Bond A has a 5% coupon that is paid semi annually. Bond B has a coupon of 4% that is paid quarterly. If price of bond A is 101.1 and price of bond B is 98.5, which one is a better buy?
3. Shape of Price and Yield Curve
Consider a 10 year bond with coupon of 4% that is paid quarterly.
a. Find the price of the bond for the following yields: i*0.5% i=1, 2....8
b. Plot the graph of price against yield (x-axis is yield)