1)LKD Co. has 13 percent coupon bonds with a YTM of 9.7 percent. The current yie

Question

1)LKD Co. has 13 percent coupon bonds with a YTM of 9.7 percent. The current yield on these bonds is 10.2 percent. How many years do these bonds have left until they mature?

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2)Consider a 8 percent coupon bond with nine years to maturity and a current price of $1,036.80. Suppose the yield on the bond suddenly increases by 2 percent.

Use duration to estimate the new price of the bond. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Calculate the new bond price. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

1)LKD Co. has 13 percent coupon bonds with a YTM of 9.7 percent. The current yield on these bonds is 10.2 percent. How many years do these bonds have left until they mature?

______________________________________________________________________________________

2)Consider a 8 percent coupon bond with nine years to maturity and a current price of $1,036.80. Suppose the yield on the bond suddenly increases by 2 percent.

a.

Use duration to estimate the new price of the bond. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

  Price $    b.

Calculate the new bond price. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

  Price $   

Explanation / Answer

1)

Current yield = 0.102 = $130/P0; So P0 = $130/0.102 = $1274.51

How many years do these bonds have left until they mature?

To calculate years left to mature

We use excel formula nper(rate,pmt,pv,fv,0) = 17.76 years

2)

a.

Using excel formula for rate

We find R = 3.716%, YTM = 2*R = 7.43%

Duration=(1.03716/0.074139)-[(1.03716+9*(0.104-.074139))/(0.074139+0.104*(1.03716-1))] = 3.59 years

Modified duration = 3.59/(1.03716) = 3.46 yeras

Estimated percent change in price = -3.46*0.02= 0.069312=(P1/P0)-1

So P1=(1-0.69312)*(1,036.80) = $964.94

Calculate the new bond price

Actual P1 = $40(PVIFA3.716%,18) + $1,000(PVIF3.716%,18) = $1,036.76

Price 1036.8 PMT 40 N 18

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