4. Suppose that the coupon rate of a floating- rate security resets every six months at a spread of 70 basis points over the reference rate. If the bond is trading at below par value, explain whether the discount margin is greater than or less than 70 basis points.
5. Suppose that an investor with a five- year investment horizon is considering purchasing a seven- year 9% coupon bond selling at par. The investor expects that he can reinvest the coupon payments at an annual interest rate of 9.4% and that at the end of the investment horizon two- year bonds will be selling to offer a yield to maturity of 11.2%. What is the total return for this bond?
6.The price value of a basis point will be the same regardless if the yield is increased or decreased by 1 basis point. However, the price value of 100 basis points ( i. e., the change in price for a 100- basis- point change in interest rates) will not be the same if the yield is increased or decreased by 100 basis points. Why?
7.State why you would agree or disagree with the following statement: As the duration of a zero- coupon bond is equal to its maturity, the price responsiveness of a zero- coupon bond to yield changes is the same regardless of the level of interest rates.
8.State why you would agree or disagree with the following statement: When interest rates are low, there will be little difference between the Macaulay duration and modified duration measures.
9. State why you would agree or disagree with the following statement: If two bonds have the same dollar duration, yield, and price, their dollar price sensitivity will be the same for a given change in interest rates.
10. The yield spread between two corporate bond issues reflects more than just differences in their credit risk. What other factors would the yield spread reflect?
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