A bond for the Chelle Corporation has the following characteristics: Maturity 12 years Coupon 10% Yield to Maturity 9.5% Macaulay Duration 5.7 years Convexity 48 Noncallable a. Calculate the approximate price change for this bond using only its duration, assuming its yield to maturity increased by 150 basis points. Discuss (without calculations) the impact when you include the convexity effect. b. Calculate the approximate price change for this bond, using only duration, if its yield to maturity declined by 300 basis points. c. Calculate the approximate price change for this bond using both duration and convexity in the computation, once again assuming that its yield to maturity declined by 300 basis points. d. Discuss (without calculations) what would happen to your estimate of the price change if this was a callable bond.
A bond for the Chelle Corporation has the following characteristics: Maturity 12 years Coupon 10% Yield to Maturity 9.5% Macaulay Duration 5.7 years Convexity 48 Noncallable a. Calculate the approximate price change for this bond using only its duration, assuming its yield to maturity increased by 150 basis points. Discuss (without calculations) the impact when you include the convexity effect. b. Calculate the approximate price change for this bond, using only duration, if its yield to maturity declined by 300 basis points. c. Calculate the approximate price change for this bond using both duration and convexity in the computation, once again assuming that its yield to maturity declined by 300 basis points. d. Discuss (without calculations) what would happen to your estimate of the price change if this was a callable bond.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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| A bond for the Chelle Corporation has the following characteristics: |
| Maturity | 12 | years |
| Coupon | 10% | |
| Yield to Maturity | 9.5% | |
| Macaulay Duration | 5.7 | years |
| Convexity | 48 | |
| Noncallable |
| a. Calculate the approximate price change for this bond using only its duration, assuming its yield to maturity increased by 150 basis points. Discuss (without calculations) the impact when you include the convexity effect. | |
| b. Calculate the approximate price change for this bond, using only duration, if its yield to maturity declined by 300 basis points. | |
| c. Calculate the approximate price change for this bond using both duration and convexity in the computation, once again assuming that its yield to maturity declined by 300 basis points. | |
| d. Discuss (without calculations) what would happen to your estimate of the price change if this was a callable bond. |
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