Question

You must invest $100,000, and the bonds listed below from A to E are the only investments available today (assume that it is possible to buy a fraction of a bond in order to invest the full $100,000). The same 6% market interest rate (APR, compounded semi-annually) applies to all of these bonds and they have the following additional characteristics: A. 6 years to maturity and 4% coupon rate (coupons paid annually) B. 3 years to maturity and 7% coupon rate (coupons paid semi-annually) C. 6 years to maturity and 0% coupon rate (discount or zero-coupon bond) D. 3 years to maturity and 4% coupon rate (coupons paid semi-annually) E. 6 years to maturity and 4% coupon rate (coupons paid semi-annually) a) Rank these bonds according to their interest rate sensitivities, from the most interest rate sensitive to the least interest rate sensitive. b) If you want to benefit from an unexpected decrease in market interest rates, which bond would you purchase?1 c) If you want to minimize interest rate risk, which bond would you purchase? d) What is the duration (in years) of the bond you chose in part c)?

Answer 1

(a) answer : Rank of these bonds following A, E, C, D, B

from the interest rate sensitivities following manner rank A>E>C>D>B

In the bond A is the most interest rate sensitive and greater maturity among all and coupons was paid annually

and bond B is lower interest rate sensitive and least maturity and provides semi annually coupon

(b) answer :

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should nvest ?n bendr which hane 1 choose c' )Y bond ơYead .