FIN 3509 Study Guide - Midterm Guide: Dividend Yield, Spot Contract, Yield Curve

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18 Dec 2017

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If a bond pays and its price decreases that means it is paying more interest per unit of investment: increases, increases. The percentage change in a bond price is equal to the negative duration times the change in yield: increases. If you compound more, interest compounds on itself more often, and observed yield is higher: may increase or decrease. If the yield is going up, a higher convexity will diminish the impact on bond prices. If the yield is going down, a higher convexity will increase the impact on bond prices: decreases (for same spot price). More known income lowers value of future relative to holding the asset: decreases. Futures prices converge to spot prices: generally increases. A very rough approximation of the dividend yield would be the coupon rate of 6% A better estimate of the dividend yield would be /103. 81 = 5. 78% which would lead to.

Related Questions

1. Which, if any, of the following statements are false?

A. For a given coupon rate, the sensitivity of bond prices to changes in interest rates increases at an increasing rate as maturity increases.

B. For a given absolute change in interest rates from the same base level, the proportionate increase in bond prices when rates fall is larger than the proportionate decrease in bond prices when rates rise.

C. For identical coupon rates and a given absolute change in interest rates from the same base level, long-term bonds change proportionately more in price than short-term bonds.

D. For identical maturities and a given absolute change in interest rates from the same base level, low-coupon bonds change proportionately less in price than high-coupon bonds.

2. What are the duration and modified duration of a seven-year, 3.5 percent coupon rate, annual coupon payment, $1000 par value government note priced today to yield 3 percent to maturity (use the text formulas or Excelâs Duration and MDuration functions)? What is the convexity of this instrument? [Recall that Bonds and Bond Properties.xls illustrates these calculations.] Using one of the following approximation formulas with yield data in decimal form,

[if text formula] % Change in Price 100 (-1.0 Duration (YieldNew-YieldOld)/(1+YieldOld)),

[if Excel function] % Change in Price 100 (-1.0 MDuration (YieldNew-YieldOld)),

what is the approximate percentage change in this bond's price if yields on comparable securities rise to 4 percent? What is the actual percentage change in this bond's price if yields on comparable securities rise to 4percent (use a financial calculator or Excelâs PV function)?

3. Consider the dividend discount model, the capital asset pricing model, the arbitrage pricing model and the firm valuation model. If these accurately portray the intrinsic values of stock prices and stock returns, then what is the corresponding fundamental relationship between stock prices and interest rates? Explain your answers.

limemouse200

A more accurate measure of the change in bond price due to changes in yield to maturity can be found using both modified duration and __________.

A. Macaulay duration

B. conversion premium

C. time to maturity

D. convexity

One CBOT corn futures contract trades in units of 5,000 bushels and the minimum initial margin is $2,500 per contract. On July 17, 2013, the Sep '13 CBOT corn futures contract settled at $6.50 per bushel. Calculate the amount of leverage inherent in the futures contract using the minimum initial margin.

Holding all else equal, an unexpected fall in interest rates will cause the value of a given outstanding call option to __________.

Bond valuation

An investor has two bonds in his portfolio that both have a face value of $1,000 and pay a 8% annual coupon. Bond L matures in 19 years, while Bond S matures in 1 year.

Assume that only one more interest payment is to be made on Bond S at its maturity and that 19 more payments are to be made on Bond L.

What will the value of the Bond L be if the going interest rate is 5%? Round your answer to the nearest cent.
$

What will the value of the Bond S be if the going interest rate is 5%? Round your answer to the nearest cent.
$

What will the value of the Bond L be if the going interest rate is 9%? Round your answer to the nearest cent.
$

What will the value of the Bond S be if the going interest rate is 9%? Round your answer to the nearest cent.
$

What will the value of the Bond L be if the going interest rate is 14%? Round your answer to the nearest cent.
$

What will the value of the Bond S be if the going interest rate is 14%? Round your answer to the nearest cent.
$

Why does the longer-term bondâs price vary more than the price of the shorter-term bond when interest rates change?

The change in price due to a change in the required rate of return decreases as a bond's maturity increases.

Long-term bonds have lower interest rate risk then do short-term bonds.

Long-term bonds have lower reinvestment rate risk then do short-term bonds.

The change in price due to a change in the required rate of return increases as a bond's maturity decreases.

Long-term bonds have greater interest rate risk then do short-term bonds.

FIN 3509 Study Guide - Midterm Guide: Dividend Yield, Spot Contract, Yield Curve

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