(b) An investor invested his wealth into three bonds for 7 years. The following table shows the market data of these three bonds: Market Price Macaulay Duration 3.19 93.26 108.04 105.91 Modified Convexity 11.77 Bond A 6.19 44.57 Bond B Bond C 8.52 83.11 The term structure is assumed to be flat and the annual effective interest rate is currently 3.2%. Suppose that the investor has $50000 initially and he invests 40% of capital in bond A, 25% of capital in Bond B and 35% in bond C. Estimate the IRR of the bond investment if the future interest rate becomes i = 4%.

(b) An investor invested his wealth into three bonds for 7 years. The following table shows the market data of these three bonds: Market Price Macaulay Duration 3.19 93.26 108.04 105.91 Modified Convexity 11.77 Bond A 6.19 44.57 Bond B Bond C 8.52 83.11 The term structure is assumed to be flat and the annual effective interest rate is currently 3.2%. Suppose that the investor has $50000 initially and he invests 40% of capital in bond A, 25% of capital in Bond B and 35% in bond C. Estimate the IRR of the bond investment if the future interest rate becomes i = 4%.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter2: The Domestic And International Financial Marketplace

Section: Chapter Questions

Problem 5P

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