Chapter 3: Valuing Bonds
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EX1: A 10-year bond with a 5% coupon and a $1,000 par value is currently priced at $820. If the current market interest rate is 8%. Should you buy the bond? Why or why not?
EX2: A $1,000 treasury bond expires in 5 years. It pays a coupon rate of 10.5%. If the market price of this bond is 1078.8, what is the yield to maturity?
EX3: A bond has a face value of $1,000, maturity is 6 years, coupon rate is 8.5% and yield to maturity is 6%.
a) Calculate the price of the bond.
b) Calculate the duration of the bond.
c) Calculate the modified duration of the bond. What does the modified duration imply?
d) What is the percentage change in bond price if the market yield rises to 9.5%? Calculate the bond price after the market yield increases. Apply the calculation of modified duration.