U9824613 阮德龍

Chapter 03
Interest rate and Security valuation

Question 22:

a.

t CF t PV of CF t Wt t ×W t
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 zero-
coupon 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.

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Therefore, the decrease in value of the asset was $4,629.89 less than the liability.

For Bank 2:

 Bond:

$1,976,362.88*PVIFn=7,i=13% = $840,074.08.

 CD:

$82,750*PVIFAn=10,i=11% + $1,000,000*PVIFn=10,i=11% = $839,518.43.

The bond value decreased $53,932.12, and the CD value fell $54,487.79. Therefore, the

decrease in value of the asset was $555.67 less than the liability.

b.

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, even though the face values and maturities

are the same. For Bank B, the maturities of the assets and liabilities are different, but the current

market values and durations are the same. Thus, the change in interest rates causes the same

(approximate) change in value for both liabilities and assets.

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Question 24:

a. T= 5 years coupon rate = 10% par value = $1,000

Assume R =10% semiannual

t CF t PV of CF t (PV of CF) × t
0.5 $50 $47.62 $23.81
1 50 45.35 45.35
1.5 50 43.19 64.79
2 50 41.14 82.27
2.5 50 39.18 97.94
3 50 37.31 111.93
3.5 50 35.53 124.37
4 50 33.84 135.37
4.5 50 32.23 14 5.04
5 $1050 $644.61 $3,223.04
total $1,000.00 $4,053.91

Duration is: D = $4,053.91/$1,000 = 4.05391 years

b. R = 14% T= 5 years semiannual coupon rate = 10%

Par value = $1,000

t CF t PV of CF t (PV of CF) × t
0.5 $50 $46.73 $23.81
1 50 45.67 45.35
1.5 50 40.81 64.79
2 50 38.14 82.27
2.5 50 35.65 97.94
3 50 33.32 111.93
3.5 50 31.14 124.37
4 50 29.10 135.37
4.5 50 27.20 14 5.04
5 $1050 $533.77 $2,668.83
total $859.53 $3,410.22

Duration is: D = $3,410.22/$859.53 = 3.96754 years

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R= 16% T= 5 coupon rate = 10% par value = $1,000 semiannual

t CF t PV of CF t (PV of CF) × t
0.5 $50 $46.29 $23.15
1 50 42.87 42.87
1.5 50 39.69 59.54
2 50 36.75 73.5
2.5 50 34.03 85.08
3 50 31.51 94.53
3.5 50 29.17 102.09
4 50 27.02 108.08
4.5 50 25.01 112.55
5 $1050 $486.35 $2,431.75
total $798.69 $3,133.14

Duration is: D = $3,133.14/$798.69 = 3.9228 years.

c. As follow:
Yield to maturity Duration
10% 4.05391 years
14% 3.96754 years
16% 3.92285 years
As the yield to maturity increase, the duration will decrease.

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Question 25:
a.
T = 4 years R= 10% coupon rate = 10% par value = $1,000
semiannual
t CF t PV of CF t PV ofCF t × t
0.5 $50 $47.62 $23.81
1 50 45.35 45.35
1.5 50 43.19 64.79
2 50 41.14 82.27
2.5 50 39.18 97.94
3 50 37.31 111.93
3.5 50 35.53 124.37
4 $1050 $710.53 $2,842.73
total $1,000.00 $3,393.19

Duration is: D = $3,393.19/ $1,000 = 3.3932 years

b.
Coupon rate = 10% par value = $1,000 R = 10% semiannual
t CF t PV of CF t PV ofCF t × t
0.5 $50 $47.62 $23.81
1 50 45.35 45.35
1.5 50 43.19 64.79
2 50 41.14 82.27
2.5 50 39.18 97.94
3 $1050 $783.53 $2,350.59
total $1,000.00 $2,664.74

Duration is: D = $2,664.74/$1,000 = 2.66474 years.

c.
Coupon rate = 10% par value = $1,000 R = 10% semiannual
t CF t PV of CF t PV ofCF t × t
0.5 $50 $47.62 $23.81
1 50 45.35 45.35
1.5 50 43.19 64.79
2 $1050
Financial Markets $863.84
and Institutions $1,727.68
Total $1,000.00 $1,861.62
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Duration is: D = $1,861.62/ $1,000 = 1.86162 years.

d.
As the time to maturity decrease, the duration will decrease, too.
Maturity Duration
4 years 3.39319 years
3 years 2.66474 years
2 years 1.86162 years
Duration and Maturity

4.00
3.3932

3.00 2.6647

1.8616
Years

2.00
Question 26:
1.00
Because the bond is zero-coupon bond, the duration will
0.00
2 3 4
be equal to the number of years to maturity.
Time to Maturity
Then, 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.

The duration of zero coupon bond if the maturity increases to 12 years is D = 12 years.

Question 27:
a. Coupon rate = 13.76% R = 10% T = 5 years annual paid
Par value = $1,000

t CF t PV of CF t PV of CF t × t
1 $137.6 $125.09 $125.09
2 137.6 113.72 227.44
3 137.6 103.38 310.14
4 137.6 93.98 375.92
5 $1,137.6 $706.36 $3.531.8
Total $1,142.53 $4,570.39

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Duration is: $4,570.39/ $1,142.53 = 4.0002 years or 4 years (approximately)

b. Show that, if interest rates rise to 10 percent within the next year and that if your
investment horizon is four years from today, you will still earn a 9 percent yield on your
investment.

Value of bond at end of year four: PV = ($137.6+ $1,000)  1.11 = $1,024.86

Future value of interest payments at end of year four:
$137.6×FVIF (4, 11%) = $648.06
Future value of all cash flows at n = 4:
Coupon interest payments over four years $550.4
Interest on interest at 11 percent 97.66
Value of bond at end of year four $1,024.86
Total future value of investment $1,672.92

Yield on purchase of asset at $1,024.86 = $1,672.92×PVIF(4, i)  i = 10.0023%.

Question 28:
a. par value = $10,000 coupon rate = 8% R =10% T = 5 years annual paid

t CF t PV of CF t PV of CF t × t
1 $800 $727.27 $727.27
2 800 661.16 1,322.31
3 800 601.16 1,803.16
4 800 546.41 2,185.64
5 $10,800 $6,705.95 $33,529.75
Total $9,241.84 $39,568.14

Duration is: D = $39,568.14/$9,241.84 = 4.28141years

b. Par value = $10,000 coupon rate = 10% R = 10% T= 5years annual paid

t CF t PV of CF t PV of CF t × t
1 $1000 $909.09 $909.09
2 1000 826.45 1,652.89
3 1000 751.31 2,253.94
4 1000 683.01 2,732.05
5 $11,000 $6,830.13 $34,150.67
Total $10,000.00 $41,698.65

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Duration is: D = $41,698.65/ $10,000 = 4.1698 years

c. Par value = $10,000 coupon rate = 12% R = 10% T= 5 annual paid

t CF t PV of CF t PV of CF t × t
1 $1200 $1,090.91 $1,090.91
2 1200 991.74 1,983.47
3 1200 901.58 2,704.73
4 1200 819.62 3,278.46
5 $11,200 6,954.32 $34,771.59
Total $10,758.16 $43,829.17

Duration is: D = $43,829.17/$10,758.16 = 4.07404 years

Question 29:
Taking the first derivative of a bond’s price (P) with respect to the yield to maturity (R) provides
the following:

dP
P
dR = - D
(1+ R)

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). This equation can be
rewritten to provide a practical application:

dP = - D¿]P

In other words, if duration is known, then the change in the price of a bond due to small changes
in interest rates, R, can be estimated using the above formula.

Question 30:
We have the equation:

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∆P
( $ 995−$ 975)
P
-D = ∆R =- $ 975 = - 4.5 years
0.5/(1+ 9.75% )
(1+ R)

So, D = 4.5 years

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