Practice Question for Ch8

Problem 1: A 3 year bond that pays 8% semi-annual coupon was issued when the yield was 7.50%. If the
yield goes down 155 basis point, what would be the predicted price of the bond? What would be the
actual price of the bond given the yield is really down 155 basis point? [Your calculated duration should
be 2.728 years]

Problem 2: A 4 year bond that pays 7.5% semi-annual coupon was issued when the yield was 8%. If the
yield goes down 55 basis point, what would be the predicted price of the bond? What would be the
actual price of the bond given the yield is really down 55 basis point? [Your calculated duration should
be 3.5242 years]

Problem 3: A 2 year bond that pays 4% semi-annual coupon was issued when the yield was 5%. If the
yield goes up 35 basis point, what would be the predicted price of the bond? What would be the actual
price of the bond given the yield is really up 35 basis point? [Your calculated duration should be 1.9413
years]

Problem 4: A 5 year bond that pays 10% annual coupon was issued when the yield was 7.50%. If the
yield goes down 65 basis point, what would be the predicted price of the bond? What would be the
actual price of the bond given the yield is really down 65 basis point? [Your calculated duration should
be 4.2121 years]

Problem 5: A 5 year bond that pays 8% annual coupon was issued when the yield was 7%. If the yield
goes up 55 basis point, what would be the predicted price of the bond? What would be the actual price
of the bond given the yield is really up 55 basis point? [Your calculated duration should be 4.3273
years]

Problem 6. Consider a 15 year 6.5% semi-annual coupon bond whose duration is approx. 9.50 years
when required rate of return (yield to maturity) is 7.58%. Prove that this bond is immunized if you hold
it for 9.50 years. (To save time, use the annuity formula to calculate the FV of cash flows instead of
doing line by line as was done in the slide)

Problem 7. Consider a 20 year 7.20% annual coupon bond whose duration is approx. 11 years when
required rate of return (yield to maturity) is 7.50%. Prove that this bond is immunized if you hold it for
11 years. (To save time, use the annuity formula to calculate the FV of cash flows instead of doing line by
line as it was done in the slide)

Problem 8. Consider a 10 year 6.50% annual coupon bond whose duration is 7.50 years when required
rate of return (yield to maturity) is 6.50%. Prove that this bond is immunized if you hold it for 7.50 years.
(To save time, use the annuity formula to calculate the FV of cash flows instead of doing line by line as it
was done in the slide)