Q2. Duration and Convexity Bond A has face value at $1,000, coupon rate of 6% paid semi-annually, 5 years to maturity, and a yield to maturity of 7%. Using the bond pricing formula, calculate the price of the bond and duration. Calculate the convexity of the bond. Using the calculations from above, what is the “approximated bond price change” using duration and convexity, if the interest rate increases by 1%? What is the actual change in the bond price if the interest rate increases by 1%? Based on c) and d) above, discuss the roles of duration and convexity in estimating the price change. Which risk measure plays a bigger role? Suppose you have two bonds with the same maturity date but one bond has a 10% coupon rate while the other has a 5% coupon rate. Which of these two bonds would have a higher duration?
Q2. Duration and Convexity Bond A has face value at $1,000, coupon rate of 6% paid semi-annually, 5 years to maturity, and a yield to maturity of 7%. Using the bond pricing formula, calculate the price of the bond and duration. Calculate the convexity of the bond. Using the calculations from above, what is the “approximated bond price change” using duration and convexity, if the interest rate increases by 1%? What is the actual change in the bond price if the interest rate increases by 1%? Based on c) and d) above, discuss the roles of duration and convexity in estimating the price change. Which risk measure plays a bigger role? Suppose you have two bonds with the same maturity date but one bond has a 10% coupon rate while the other has a 5% coupon rate. Which of these two bonds would have a higher duration?
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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Q2. Duration and Convexity
Bond A has face value at $1,000, coupon rate of 6% paid semi-annually, 5 years to maturity, and a yield to maturity of 7%.
- Using the
bond pricing formula, calculate the price of the bond and duration. - Calculate the convexity of the bond.
- Using the calculations from above, what is the “approximated bond price change” using duration and convexity, if the interest rate increases by 1%?
- What is the actual change in the bond price if the interest rate increases by 1%?
- Based on c) and d) above, discuss the roles of duration and convexity in estimating the price change. Which risk measure plays a bigger role?
- Suppose you have two bonds with the same maturity date but one bond has a 10% coupon rate while the other has a 5% coupon rate. Which of these two bonds would have a higher duration?
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