978-0077502249 Chapter 11 Solution Manual Part 2

subject Type Homework Help
subject Pages 8
subject Words 2582
subject Authors Alan Marcus, Alex Kane, Zvi Bodie

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Chapter 11 - Managing Bond Portfolios
1. The maturity of the 30-year bond will fall to 25 years, and the yield is forecast to be 8%.
Therefore, the price forecast for the bond is:
$893.25 [n = 25; i = 8; FV = 1,000; PMT = 70]
At a 6% interest rate, the five coupon payments will accumulate to $394.60 (FV) after
2.
a. Using a financial calculator, we find that the price of the zero-coupon bond
(with $1000 face value) is:
For yield to maturity of 8%: $374.84
For yield to maturity of 9%: $333.28
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Chapter 11 - Managing Bond Portfolios
Actual % loss
=$333. 28$374 . 84
$374 .84 =0. 1109
, an 11.09% loss
The percentage loss predicted by the duration-with-convexity rule is:
Predicted % loss = [(–11.81) 0.01] + [0.5 150.3 (0.01)2]
b. Now assume yield to maturity falls to 7%. The price of the zero increases to
$422.04, and the price of the coupon bond increases to $875.91.
Zero C oupon B ond
Actual % gain
=$422 .04$374 . 84
$374 . 84 =0. 1259
, a 12.59% gain
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Chapter 11 - Managing Bond Portfolios
CFA 1
CFA 3
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Chapter 11 - Managing Bond Portfolios
Answer:
CFA 4
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Chapter 11 - Managing Bond Portfolios
Maturity effect: As bonds near maturity, the effect of credit quality on
spreads can also change. This can affect bonds of different initial credit
quality differently.
CFA 5
Answer:
∆P/P = −D* ∆y
CFA 6
Answer:
a. For an option-free bond, the effective duration and modified duration are
approximately the same. The duration of the bond described in Table 22A is
calculated as follows:
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Chapter 11 - Managing Bond Portfolios
CFA 7
Answer:
CFA 8
Answer:
CFA 9
Answer:
The economic climate is one of impending interest rate increases. Hence, we will want
to shorten portfolio duration.
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Chapter 11 - Managing Bond Portfolios
CFA 10
Answer:
CFA 11
Answer:
a. A manager who believes that the level of interest rates will change should
engage in a rate anticipation swap, lengthening duration if rates are expected to
fall, and shortening duration if rates are expected to rise.
CFA 12
11-7
whole or part.
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