Chapter 11, Problem 25PS

Summary Introduction

(a)

To Discuss:

To build a spreadsheet to calculate the convexity of the 8% coupon bond in spreadsheet 11.1 at the initial yield to maturity of 10% using the footnote in Chapter 2 which presents the formula for the convexity of a bond.

  

Introduction:

A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond.A zero-coupon bond is a bond in which the face value is repaid at the maturity time.

Yield to maturity means the discount rate which makes the present payments from the bond equal to the price, in simple terms it is the average rate of return a holder can expect from that bond.

Convexity is a measure of the curvature in the relationship between bond prices and bondyields that demonstrates how the duration of a bond changes as the interest rate changes.

Summary Introduction

(b)

To Discuss:

To determine the convexity of the zero-coupon bond.

  

Introduction:

A bond is a security that creates an obligation on the issuer to make specified payments to the holder for a given period of time. The face value of the bond is the amount the holder will receive on maturity along with the coupon rate which is also known as the interest rate of the bond. A zero-coupon bond is a bond in which the face value is repaid at the maturity time.

Yield to maturity means the discount rate which makes the present payments from the bond equal to the price, in simple terms it is the average rate of return a holder can expect from that bond.

Convexity is a measure of the curvature in the relationship between bond prices and bond yields that demonstrates how the duration of a bond changes as the interest rate changes.