In 10 years, a $200,000,000 liability is due. Only one bond is available to you: ABC company, 10 years semiannual payments, 4% YTM, 8% coupon, 3% reinvestment rate, BBB credit rating.

In 10 years, a $200,000,000 liability is due. Only one bond is available to you: ABC company, 10 years semiannual payments, 4% YTM, 8% coupon, 3% reinvestment rate, BBB credit rating.

a. Provide the # of bonds needed to fund the liability and the cost.

b. If the reinvestment rate falls from 3% to 2%, what is the projected deficit?

c. To prevent a deficit, explain how immunization can work, how it can help you and what conditions are required.

3. Using the same bond in #2:

a. Calculate the effective duration and effective convexity. Do not provide Macaulay or Modified figures.

b. If the YTM falls by 70 basis points, provide the new price of the bond based on duration and convexity.

c. Also provide the new price of the bond based on a financial calculator.

d. If the bond is held for 5 years, provide the HPR (holding period return), assuming no change in the YTM.

e. If the bond were callable in year 4 at 101, provide the YTC (yield to call).

4. A bond is issued for $100,000,000 for 25 years, amortizing quarterly. It was issued at par with a yield of 5% (at inception the coupon was also 5%). 18 years have gone by. At 18 years, the coupon remains at 5% but the yield has dropped to 3% YTM.

a. Provide the estimated price factor.

b. If the bid/ ask price is 93/95, as an investor with $200,000, how many of these bonds can you buy?

c. Excluding accrued interest, after you buy the bonds, what will the value of your account be (on the broker’s website or your statement)?

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