MLK Bank has an asset portfolio that consists of $90 million of 30-year, 9 perce
ID: 2821428 • Letter: M
Question
MLK Bank has an asset portfolio that consists of $90 million of 30-year, 9 percent coupon, $1,000 bonds with annual coupon payments that sell at par a-1. What will be the bonds' new prices if market yields change immediately by 0.10 percent? a-2. What will be the new prices if market yields change immediately by 2.00 percent? b-1. The duration of these bonds is 111983 years. What are the predicted bond prices in each of the four cases using the duration rule? b-2. What is the amount of error between the duration prediction and the actual market values? Complete this question by entering your answers in the tabs below. Required A1 Required A2 Required B1 Required B2 The duration of these bonds is 11.1983 years. What are the predicted bond prices in each of the four cases using the duration rule? (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g. 32.16)) Bonds New Price At + 0.10% At-010% archExplanation / Answer
B1: Computation of Modified Duration (If bond is selling at par YTM = Coupon Rate)
Modified Duration = Duration / (1+YTM)
Modified Duration = 11.1983 / (1+0.09)
Modified Duration = 10.2737
A change in basis point will result in reverse impact on bond price
At +0.10%
Bond Price = Current Bond Price - Current Bond Price * Change in Basis * Modified Duration
Bond Price = 1000 - 1000 * 0.10% * 10.2737
Bond Price = $989.73
At -0.10%
Bond Price = Current Bond Price + Current Bond Price * Change in Basis * Modified Duration
Bond Price = 1000 + 1000 * 0.10% * 10.2737
Bond Price = $1010.27
At +2.00%
Bond Price = Current Bond Price - Current Bond Price * Change in Basis * Modified Duration
Bond Price = 1000 - 1000 * 2.00% * 10.2737
Bond Price = $794.53
At -2.00%
Bond Price = Current Bond Price + Current Bond Price * Change in Basis * Modified Duration
Bond Price = 1000 + 1000 * 2.00% * 10.2737
Bond Price = $1205.47
Please ask Remaining question B2 separately
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