1) A 1-year discount bond with a face value of $1,000 was purchased for $900. Wh
ID: 2617336 • Letter: 1
Question
1) A 1-year discount bond with a face value of $1,000 was purchased for $900.
What is the yield to maturity to 2 decimal places?
What is the yield on a discount basis to 2 decimal places?
2) Your company owns the following bonds:
Bond
Market Value
Duration
A
$13 million
2
B
$18 million
9
C
$20 million
3
If general interest rates rise from 8% to 8.5%, what is the approximate change in the value of the portfolio?
3) Suppose a municipal bond offers a yield to maturity of 5% and a same maturity corporate bond offers a 4% yield. For which values of the marginal tax rate an investor would prefer to buy the corporate bond?
Bond
Market Value
Duration
A
$13 million
2
B
$18 million
9
C
$20 million
3
Explanation / Answer
Ans 1) Bond Price = Face Value/(1 + yield to maturity)
900 = 1000/(1 + yield to maturity)
Yield to maturity = 1000/900 - 1
= .11
In percentage term it will be 11.11%
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