Company A has out standing Rs.1, 000 par value bonds with maturity period of 15 years from now and Company B h

Question

Company A has out standing Rs.1, 000 par value bonds with maturity period of 15 years from now and Company B has outstanding Rs.500 par value bonds with maturity period of less than one year from now.
Both the bonds have coupon rates of 10% p.a, and the interest is paid semi-annually on both the bonds.
Explain that which company’s bonds would have high interest rate risk and why.

Answer 1

Interest rate risk has two elements: capital risk and re-investment risk.

Capital risk is the risk that the bond will fall in price if interest rates rise (and visa-versa as risk is both upside and downside volatility).

Reinestment risk is the risk that the coupons will have to be reinvested at a lower risk if rates are falling (and visa-versa). In rising interest rate environment, capital values sinks but are partly offset by improved revinestment of coupons.

So how does one measure the two conflicting influences? The most common measure of interest rate is called "Macaulay duration".

Duration = [Σ (CFt/(1+i)^t * t/P]

CFt = cash flow of bond at period t
i = interest rate
t = time period
P = Price of bond

Since we don't know what price the bonds were issued, we cannot answer this question.

Assuming the bonds are at par, Company A has higher duration.

Answer 2

High interest risk is ; bond price falls in the opposite direction of interest..well since both of your bond has same coupon rate and still they have difference in Term to maturity...considering that BOND A will be more interest risk prone for sure bcos of longer TTM.

Answer 3

A) so we've inputs FV=one thousand (destiny par value) n=sixteen (8 years left *2 pmts/3 hundred and sixty 5 days) i=3 (6%/2, semiannual cost) PMT=50 ($one hundred coupon/2 events a 300 and sixty 5 days) PV= what we are finding for, cutting-edge value fixing for PV you get $1251.22 b) the cost might start to decline nearer to par value, $one thousand