6. What is the total return of the corporate bond? Base your estimate of price a

Question

6. What is the total return of the corporate bond? Base your estimate of price appreciation (depreciation) only on the duration statistic that is given. Please remember the example from class (on board).

A. -2.5%

B. 3.5%

C. 6.5%

D. 8.5%

E. 9.0%

F. 11.0%

Time 0 Time 1 10-Year Treasury Bond Rate 2.00% 3.00% Credit Risk Premium 2.00% 1.75% Liquidity Risk Premium 2.00% 1.75% Corporate Bond Rate (YTM) 6.00% 6.50% Duration 5 Coupon Over Prior Year (Fixed Rate) $60.00 Price (Actual For Time 0) $1,000.00

Explanation / Answer

Yield at Time 0=6%

Yield at Time 1=6.5%

So, 0.5% rise in yield

Bond was bought at 1000

Bond price at t=1 @6% should be 1000*1.06-60=1000

So, Bond price at t=1 @6.5% should be 1000-5*(0.5%)*1000=975

Coupons=60

Return=(975+60-1000)/1000=3.5%

Related Questions

Navigate

• Browse (All)
• Browse 6
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.