Fixed Income HW due 6/29/19

Assume today is June 19, 2019 and that all bonds payinterest annually with a face value of $1,000. YTM= Current yield + Capital Gains yield; CY = Annual Interest/CurrentPrice

GE is A rated; AA Treasuries yield 3-year is 1.90%, 10-year2.10%

5 Years ago GE issued 6% coupon paying bonds with a face valueset to mature on June 19, 2029. Growth concerns have forcedmonetary authorities throughout the world to lower interest ratesduring the past several years and as such, the price of these GEbonds has risen to 1175.00

1. What is yield to maturity for an investor who buys the bondstoday at the current price?
2. Is the bond trading at a premium, discount or at par? Explainwhat your answer means
3. What is the capital gains yield of this bond and interpret whatthe sign of the CGY means?
4. What would happen to the price of the bond you calculated in 1if GE became the subject of a liability issue where ithypothetically gets sued for $50 billion?
5. Ignoring the scenario in question 4 and focusing on theinformation given, do you think GE would call the bonds if theycould? WHY? Suppose that the bonds were callable in 3 years at1050. Calculate the yield to call. Which rate here is morerelevant, the YTM or the YTC?
6. List two factors that would increase the riskiness of a bond asit relates to a change in interest rates.
7. Calculate your annualized return if you assume that you buy thebonds today and they are not called, and you reinvest the interestin years 1-5 at 3% and in year 6-10 at 5%.

Explain why your answer differs from the YTM that you calculatedin question 1.

8. Calculate the Macaulay Duration and Modified Duration for thesebonds based on today’s price. Given your calculations estimate whatwould happen to the price of the bonds if interest rates were torise 1% from current (today’s levels). Assume the change isimmediate and dissect the change in price due to duration andcompare it to the actual calculated change in price.