A bond has a Modified duration of 6.3 years and a convexity of 103.1. Interest ratesare currently constant at 9.3%. There is a 35% chance of interest rates increasing to13.1%, a 54% chance of interest rates staying constant, and a 11% chance ofinterest rates decreasing to 7.9%. Under this scenario, which answer below is theclosest to the standard deviation of bond returns?O a. 0.0482O b. 0.0796Oc. 0.0718O d. 0.0940O e. 0.0916O f.0.1017Og. 0.0649Oh. 0.0575

Bond returns refer to the financial gains or losses that an investor earns from holding and/or…

Answered: interest rates decreasing to 7.9%.…

interest rates decreasing to 7.9%. Under this scenario, which answer below is the closest to the standard deviation of bond returns?

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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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

A bond has a Modified duration of 6.3 years and a convexity of 103.1. Interest rates
are currently constant at 9.3%. There is a 35% chance of interest rates increasing to
13.1%, a 54% chance of interest rates staying constant, and a 11% chance of
interest rates decreasing to 7.9%. Under this scenario, which answer below is the
closest to the standard deviation of bond returns?
O a. 0.0482
O b. 0.0796
Oc. 0.0718
O d. 0.0940
O e. 0.0916
O f.
0.1017
Og. 0.0649
Oh. 0.0575

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