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A two-year, 8% coupon bond with a face value of $1,000 has a current price of...

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Finance

A two-year, 8% coupon bond with a face value of $1,000 has acurrent price of $1,000. Assume that the bond makes annual couponpayments. The term structure of interest rates is flat.

(a) What is the bond’s yield-to-maturity?

(b) Using the concept of duration, find the approximatepercentage change in the price of the bond if the yield-to-maturitydrops by 1%.

(c) Compared with the coupon bond in this problem, would theprice of a two-year, U.S. Treasury STRIP change more or less inresponse to the change in interest rates? Why?

Answer & Explanation Solved by verified expert
3.6 Ratings (488 Votes)
a Yield to maturity 8 Reason When current price and value of the bond is same then yield to maturity rate would be same that of coupon interest Hence yield to maturity equals to coupon interest 8 b Calculation of Macaulay    See Answer
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Transcribed Image Text

A two-year, 8% coupon bond with a face value of $1,000 has acurrent price of $1,000. Assume that the bond makes annual couponpayments. The term structure of interest rates is flat.(a) What is the bond’s yield-to-maturity?(b) Using the concept of duration, find the approximatepercentage change in the price of the bond if the yield-to-maturitydrops by 1%.(c) Compared with the coupon bond in this problem, would theprice of a two-year, U.S. Treasury STRIP change more or less inresponse to the change in interest rates? Why?

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