Problem
Set
6
for
Capital
Markets,
Interest
Rates
A.
Bond
Prices
and
Yield
to
Maturity
Price
[$]
A
B
C
D
400
500
390
100
Maturity
[y]
Yield
to
Maturity
Face
value
[$]
20
4.69%
1000.377666
10
7.17%
999.3147817
10
10.00%
1011.559559
40
5.93%
1001.748939
1.
An
increase
of
5%
on
bond
B
&
D
results
in
a
loss
of
34,63
percent
on
a
portfolio
that
consists
of
5
long
bond
of
D
and
one
short
bond
of
D.
Price
before
increase
Price
after
[$]
increase
[$]
Change
[$]
Change
in
%
-‐
B
500
316.9093938
-‐183.0906062
0.366181212
-‐
D
100
15.8051409
-‐84.1948591
0.841948591
B
Portfolio
D
Total
2500
1584.546969
100
15.8051409
2400
1568.741828
-‐
-‐915.4530309
0.366181212
-‐
-‐84.1948591
0.841948591
-‐
-‐831.2581718
0.346357572
2.
Bonds
are
generally
sensitive
to
interest
rates
changes.
This
is
especially
true
for
bond
D,
whose
maturity
of
40
years
results
in
a
very
high
loss
of
its
price
in
case
interest
rates
go
up.
In
general
we
can
say:
the
longer
the
maturity,
the
more
powerful
the
magic
of
compounding,
the...