2. Below in the table are the prices, Dv0l's and convexities of a 20-year Treasury bond and a calloption on this bond. The call is on $100 face of the bond.CallConvexityYieldBondBondDV010.08BondCallCallDV01Price100.000ConvexityPrice5.00%7050.049000(a) A callable bond is a portfolio of long position in the 20-year bond and short position in the call.What are the duration and convexity for the callable bond?(b) Construct a portfolio of the callable and the call option that has zero duration and positiveconvexity?

a. There is risk of interest rate of bonds because bond price change inversely. Full valuation…

Answered: D0.000 0.08

Business

Accounting

D0.000 0.08

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

2. Below in the table are the prices, Dv0l's and convexities of a 20-year Treasury bond and a call
option on this bond. The call is on $100 face of the bond.
Call
Convexity
Yield
Bond
Bond
DV01
0.08
Bond
Call
Call
DV01
Price
100.000
Convexity
Price
5.00%
70
5
0.04
9000
(a) A callable bond is a portfolio of long position in the 20-year bond and short position in the call.
What are the duration and convexity for the callable bond?
(b) Construct a portfolio of the callable and the call option that has zero duration and positive
convexity?

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