Math Guruu 4 Prob. 1 $ Coupon Par Cash Flows: Purchase price 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5

Prob. 1

$
Coupon
Par
Cash Flows:
Purchase price
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
Yield

Prob. 2

$
Coupon
Par
Cash Flows:
Start
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
Yield

Prob. 3

ABCD
Market yieldPlace text answer in the box below.
Price
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
12.0

Prob. 4

AB
Coupon
Par
YTM
Cash Flows:
Start
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
12.0

Prob. 5

a. Durationb. Price
ABAB
YTM
Coupon
Par
Cash Flows:
Purchase price
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
New Price is
Alfonso Canella: Alfonso Canella:
When interest rates rise, as they do in this example, bond prices fall. Conversely, when rates fall, bond prices rise. The relationship is inverse. Duration is used as a proxy for how exposed your bond is to changes in interest rates. The higher the duration, the more exposed you are to changes in interest rates. So, if you expect rates to rise and bond prices to fall, you will try to reduce the duration of your bonds. If you expect rates to fall and prices to rise, you increase the duration of your bonds. In the first instance, you reduce your losses. In the second instance, you maximize your gains.

Bond portfolio management is ALL about taking a position on future interest rates and, in some cases too, about taking a position on the long term credit quality of the bonds.

Bonds that are tied to mortgages have various risks: interest rates increases or falls, credit quality erosion, and pre-payment (when mortgages are refinanced or homes are sold and the mortgage is paid off). These mortgage-backed bonds were the cause of the 2008 economic crisis. Too many mortgages defaulted (in other words, credit quality collapsed) and the bonds tied to these mortgages defaulted, triggering bank losses and the crisis.


Alfonso Canella: Alfonso Canella:
When interest rates rise, as they do in this example, bond prices fall. Conversely, when rates fall, bond prices rise. The relationship is inverse. Duration is used as a proxy for how exposed your bond is to changes in interest rates. The higher the duration, the more exposed you are to changes in interest rates. So, if you expect rates to rise and bond prices to fall, you will try to reduce the duration of your bonds. If you expect rates to fall and prices to rise, you increase the duration of your bonds. In the first instance, you reduce your losses. In the second instance, you maximize your gains.

Bond portfolio management is ALL about taking a position on future interest rates and, in some cases too, about taking a position on the long term credit quality of the bonds.

Bonds that are tied to mortgages have various risks: interest rates increases or falls, credit quality erosion, and pre-payment (when mortgages are refinanced or homes are sold and the mortgage is paid off). These mortgage-backed bonds were the cause of the 2008 economic crisis. Too many mortgages defaulted (in other words, credit quality collapsed) and the bonds tied to these mortgages defaulted, triggering bank losses and the crisis.

when rates rise to

v. JAN ’22

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