International Bonds and Markets
(a) Calculate both Macaulay and modified durations of the 8-year, 8.5% coupon bond given a flat yield curve a 10%.
(b) Explain why zero coupon bonds have a higher Macaulay Duration than coupon paying bonds of the same return.
(c) Comments on what is meant by the statement: "The financial markets are markets for loanable funds."
(d) Define the following international bonds and markets:
a. Eurobond Market
b. Foreign Bond
c. Internal Market or National Market
d. External Market or Offshore Market
e. Interbank Foreign Exchange Market
1. Generate the price-yield curve for a zero-coupon bond with a face value of £100 and 260 actual days to maturity using the following annual yields: 4%, 4.25%, 4.5%, 4.75%, 5%, 5.25%, 5.5%, 5.75%, 6%, 6.25%, 6.5%, 6.75%, 7%, 7.25, 7.5%, 7.75%, and 8%. Use actual/actual day count convention
2. Given a 10-year, 8% coupon bond with a face value of £100 and semi-annual coupon payments:
a. Generate the bond's price-yield curve using annual yields ranging from 5% to 10% and differing by .5%.
b. what is the price change when the yield increases from 8% to 8.5%?
c. What is the price change while the yield decreases from 8% to 7.5%?
d. Comment on the capital gain and capital loss you observe in b and c.
e. Comment on the features of the price-yield curve.
3. Explain why the yield curve for lower quality bonds could be negatively sloped when the yield curves for other bonds are not.