U9824613

阮德龍
Chapter 03
Interest rate and Security valuation

Question 22:
a.
CFt

t

PV of CFt

Wt

t × Wt

1

100

89.286

0.092

0.092

2

1100

876.913

0.908

1.816

total

P0= 966.199

1

D = 1.908

The Duration is 1.908 years
b.

Because the bond is zero-coupon bond, the duration will equal to the number of periods
until a bond matures.
So, D = T = 5 years.

c. The increasing in the yield to maturity decreases the duration of the bond. With the zerocoupon bond the yield to maturity increases make the duration of zero-coupon bond
increase in the same number of periods.

Question 23:
a.
For Bank 1, an increase of 100 basis points in interest rate will cause the market values of
assets and liabilities to decrease as follows:

Loan:

$120,000*PVIFAn=10,i=13% + $1,000,000*PVIFn=10,i=13% =$945,737.57.

CD:

$100,000*PVIFAn=10,i=11% + $1,000,000*PVIFn=10,i=11% = $941,107.68.

Financial Markets and Institutions

The bond value decreased $53.932. Thus. and the CD value fell $54.U9824613 阮德龍 Therefore.000.43.79. Question 24: Financial Markets and Institutions .i=13% = $840.i=11% = $839.629.88*PVIFn=7. the decrease in value of the asset was $4.976.000*PVIFn=10. The assets and liabilities of Bank A change in value by different amounts because the durations of the assets and liabilities are not the same. but the current market values and durations are the same. b. For Bank B.487.362.89 less than the liability. the maturities of the assets and liabilities are different.518.08. the change in interest rates causes the same (approximate) change in value for both liabilities and assets. the decrease in value of the asset was $555. • CD: $82.12. For Bank 2: • Bond: $1.750*PVIFAn=10.074.i=11% + $1. Therefore. even though the face values and maturities are the same.67 less than the liability.

62 $23.79 2 50 38.00 $4.5 50 32.35 1.91 5 total Duration is: D = $4.5 50 31.67 45.5 50 43.84 135.94 3 50 33.14 82.27 2.04 $1.53 124.37 4.81 1 50 45.14 82.5 50 35.81 1 50 45.18 97.93 3.5 50 35.000 t CFt PV of CFt (PV of CF) × t 0.5 $50 $46.05391 years b.053.79 2 50 41.65 97.000 (PV of CF) × t $50 $47.14 124.19 64.5 50 39.35 1.81 64.223.32 111.94 3 50 37.23 14 5.37 Financial Markets and Institutions . R = 14% T= 5 years semiannual coupon rate = 10% Par value = $1.61 $3.31 111. T= 5 years coupon rate = 10% Assume R =10% semiannual t CFt 0.000 = 4.053.27 2.37 4 50 33.35 45.U9824613 阮德龍 a.000.73 $23.93 3.5 50 40.5 PV of CFt par value = $1.04 $1050 $644.91/$1.

08 4.410.55 $1050 $486.22 5 total Duration is: D = $3.431.87 42.09 4 50 27.69 $3. c.5 50 25.14 5 total Duration is: D = $3.35 $2.05391 years Financial Markets and Institutions semiannual .69 59.U9824613 阮德龍 4 50 29.02 108. As follow: Yield to maturity 10% Duration 4.51 94.133.5 50 39.5 50 27.5 50 34.01 112.17 102.000 (PV of CF) × t 0.96754 years R= 16% t T= 5 coupon rate = 10% CFt PV of CFt par value = $1.87 1.5 $50 $46.14/$798.77 $2.04 $1050 $533.668.75 73.53 = 3.37 4.75 $798.08 3 50 31.20 14 5.5 2.69 = 3.410.53 $3.9228 years.5 50 29.15 1 50 42.53 3.29 $23.10 135.54 2 50 36.22/$859.133.03 85.83 $859.

19 64.5 50 43.5 CFt coupon rate = 10% PV of CFt par value = $1.000 PV of CFt × t $50 $47.79 2 50 41. the duration will decrease.92285 years As the yield to maturity increase.35 1. T = 4 years semiannual R= 10% t 0. Question 25: a.U9824613 阮德龍 14% 3.27 2.393.31 111.53 124.5 50 39.18 97. Coupon rate = 10% par value = $1.393.73 $1.81 1 50 45.000 = 3.62 $23.14 82.5 50 35.35 45.000 R = 10% Financial Markets and Institutions semiannual .3932 years b.94 3 50 37.96754 years 16% 3.000.53 $2.19 4 total Duration is: D = $3.00 $3.19/ $1.37 $1050 $710.842.93 3.

000.664.35 1.664.861.74/$1.35 1.000 = 2. Maturity Duration 4 years 3.79 $1050 $863. the duration will decrease.66474 years.86162 years.19 64.U9824613 阮德龍 CFt t 0.79 2 50 41.94 $1050 $783.14 82.62 $23.5 50 43.62 $23.81 1 50 45.5 PV of CFt PV of CFt × t $50 $47.68 $1.18 97.19 64.5 50 43.35 45.000. As the time to maturity decrease.53 $2.35 45.000 = 1.5 50 39.00 $1.84 $1. Coupon rate = 10% t 0.86162 years Question 26: Financial Markets and Institutions .66474 years 2 years 1. a.62/ $1.62 2 Total Duration is: D = $1.5 par value = $1. c.39319 years 3 years 2. too.000 R = 10% PV of CFt CFt semiannual PV of CFt × t $50 $47.59 $1.861.74 3 total Duration is: D = $2.727.27 2.00 $2.81 1 50 45.350.

92 5 $1.92 Yield on purchase of asset at $1.39/ $1. the duration of zero coupon bond that has 8 years to maturity is D = 8 years The duration of zero coupon bond if the maturity increase to 10 years is D = 10 years. Coupon rate = 13. Then.66 Value of bond at end of year four $1.6 113.570.024.137.53 annual paid $3. i) ⇒ i = 10.09 $125.672. Financial Markets and Institutions . the duration will be equal to the number of years to maturity.39 Duration is: $4.6×FVIF (4.92×PVIF(4.142.86 Future value of interest payments at end of year four: $137.000 CFt t R = 10% T = 5 years PV of CFt PV of CFt × t 1 $137. you will still earn a 9 percent yield on your investment.570.6 $706.024.0002 years or 4 years (approximately) b.98 375.8 $4.6 $125. The duration of zero coupon bond if the maturity increases to 12 years is D = 12 years.44 3 137. if interest rates rise to 10 percent within the next year and that if your investment horizon is four years from today.024.53 = 4.76% Par value = $1. 11%) = $648.86 Total future value of investment $1.06 Future value of all cash flows at n = 4: Coupon interest payments over four years $550.0023%.6 103.142. Show that.531.09 2 137.U9824613 阮德龍 Because the bond is zero-coupon bond.72 227.6 93.4 Interest on interest at 11 percent 97.14 4 137.36 Total $1. Value of bond at end of year four: PV = ($137.38 310.86 = $1. Question 27: a.6+ $1.11 = $1.000)  1.672.

31 2.732.652.84 = 4.150.800 $6.91 2 1200 991.65/ $10.000 CFt t coupon rate = 10% R = 10% PV of CFt T= 5years PV of CFt × t 1 $1000 $909.253.31 3 800 601.74 1.185.983.14/$9.67 $10.45 1.01 2.241.00 $41.705.090.64 5 $10.000 = 4.830.090.803.95 $33.000 t CFt coupon rate = 12% R = 10% T= 5 PV of CFt PV of CFt × t 1 $1200 $1.91 $1.13 $34.28141years b. Par value = $10.27 $727.16 1.94 4 1000 683.529.U9824613 阮德龍 Question 28: a. par value = $10.05 5 $11.698.65 Total annual paid Duration is: D = $41.09 $909.322.000 CFt t coupon rate = 8% R =10% PV of CFt T = 5 years annual paid PV of CFt × t 1 $800 $727.89 3 1000 751.241.47 Financial Markets and Institutions annual paid .000 $6.16 4 800 546.27 2 800 661.000.1698 years c.14 Total Duration is: D = $39.698. Par value = $10.84 $39.16 1.75 $9.41 2.09 2 1000 826.568.568.

278.758. This equation can be rewritten to provide a practical application: dP = .62 3.16 = 4.5 years Financial Markets and Institutions .46 5 $11.32 $34.829.758.954.73 4 1200 819.200 6.4.($995-$975)$9750. D = 4. if duration is known.5 years So. Question 30: We have the equation: -D = ∆PP∆R(1+R) =.17 Total Duration is: D = $43.58 2.07404 years Question 29: Taking the first derivative of a bond’s price (P) with respect to the yield to maturity (R) provides the following: dPPdR(1+R) = .75%) = . then the change in the price of a bond due to small changes in interest rates. R.D The economic interpretation is that D is a measure of the percentage change in the price of a bond for a given percentage change in yield to maturity (interest elasticity). can be estimated using the above formula.829.16 $43.D [dR1+R ]P In other words.17/$10.U9824613 阮德龍 3 1200 901.771.59 $10.5/(1+9.704.

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