INVESTMENTS, CHAPTER 10
EXPLORING INVESTMENTS: MEASURING BOND PRICE VOLATILITY--BOND DURATION
We know that when interest rates go up, bond prices fall. There are
several factors that affect the amount by which the price of a particular
bond will fall. We will look at some of these factors, and then examine
duration, a statistic for measuring the price volatility of a bond.
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Assuming all other factors constant, if interest rates rise 1 percent,
which of the following two bonds will lose more value?
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A 9% coupon bond with a 30 year maturity
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A 9% coupon bond with a 15 year maturity
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Assuming all other factors constant, if interest rates rise 1 percent,
which of the following bonds will lose more value?
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A 9% coupon bond with a 30 year maturity
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A 6% coupon bond with a 30 year maturity
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Assuming all other factors constant, if interest rates rise 1 percent,
which of the following bonds will lose more value?
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A bond with a YTM of 9%
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A bond with a YTM of 7%
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Assuming all other factors constant, if interest rates rise 1 percent,
which of the following bonds will lose more value?
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A bond which pays interest monthly
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A bond which pays interest semiannually
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Bond duration can help us gauge how sensitive a bond price is to changes
in interest rates. Use the duration calculator at the
Investopedia
website to determine the duration of
each of the following bonds which are priced to yield 10 percent. (Once
you get your answer, be sure to read the interpretation just below it; doing so
will help you determine whether you have entered the correct variables in the
calculator)
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A 9% coupon bond with a 30 year maturity
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A 6% coupon bond with a 15 year maturity
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Based on your duration results in Part 5, by what percent would the price
of each bond fall if interest rates rose 1 percent?