Peactree Securities

1. a. They vary so widely because it depends on the type of bond being issued (fixed rate, floating rate bond, etc) and the credit of the issuer, the duration of the bond, and the market conditions when issued.

b. 5 yr bond

5=N

10=I/Y

45=PMT

1000=FV

CPT PV= $791.51

15-yr bond

15=N

10=I/Y

82.5=PMT

1000=FV

CPT PV=$866.89

25-yr bond

25=N

10=I/Y

126.25=PMT

1000=FV

CPT PV= $1238.27

c. 5-yr bond

10=N

5=I/Y

22.5=PMT

1000=FV

CPT PV= $787.65

15-yr bond

30=N

5=I/Y

41.25=PMT

1000=FV

CPT PV= $865.49

25-yr bond

50=N

5=I/y

63.13=PMT

1000=FV

CPT PV= $1239.70

They are selling at a premium.

2. a. Yield to maturity- the rate of return earned on a bond if it is held to maturity. Yield to maturity can also be viewed as the bond’s promised rate of return, which is the return that investors will receive if all promised payments are made.

b. 5 yr bond

10=N

-800=PV

22.50=PMT

1000=FV

CPT I/Y= 4.82% semi-annual 4.82 x 2 =9.63% annual

15-yr bond

30=N

-865.49=PV

41.25=PMT

1000=FV

CPT I/Y= 5% semi-annual 5% x2= 10% annual

25-yr bond

50=N

-1220=PV

63.13=PMT

1000=FV

CPT I/Y= 5.1% semi-annual 5.1% x 2= 10.2% annual

4 . a. interest rate risk- is the risk of a decline in a bond’s price due to an increase in interest rate.

Reinvestment rate risk-is the risk that a decline in interest rates will lead to a decline in income from a bond portfolio.

b. The 25-yr bond had the most interest rate risk because its annual interest rate is the highest of the three at 10.2%.

c. 5-yr bond

10=N

6.5=I/Y

50=PMT

1000=FV

CPT PV=$892.17

15-yr bond

30=N

6.5=I/Y

50=PMT

1000=FV

CPT PV=$804.12

25-yr bond

50=N

6.5=I/Y

50=PMT

1000=FV

CPT PV=$779.12

25-yr bond would be most affected because its value dropped from $1239.70 to $779.13

15-yr bond would be least affected because its value increased from $787.65 to $892.17.

d. The $100,000,000 has the highest reinvestment rate risk because it has a higher coupon rate. The...