INVESTMENTS-CONNECT PLUS ACCESS
INVESTMENTS-CONNECT PLUS ACCESS
11th Edition
ISBN: 2810022611546
Author: Bodie
Publisher: MCG
Question
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Chapter 16, Problem 2CP

A

Summary Introduction

To calculate: Predicted price change of the bond in 10 years of duration.

Introduction: The interest rates and price are inversely proportional to each other. If one quantity will increase other will automatically decreases. As yield to maturity is increased by 1 %, the price will hence decrease.

B

Summary Introduction

To calculate: The change in price due to change in convexity of the bond.

Introduction: Convexity is a curve which establishes a relationship between bond price and bond yield. This is also used to manage the risk. Positive convexity means rise in duration but fall in yields.

C

Summary Introduction

To calculate: Modified duration of the bond.

Introduction: The modified duration is defined as a change in security with respect to the change in the interest rates. There is an inverse relationship between price of bond and interest rates.

D

Summary Introduction

To select: Effect on the duration of bond when interest rates decreases.

Introduction : Duration of the bond is dependent on the price of the bond and prices are inversely related to the interest rates. As interest rates fall down indirectly the duration is going upside.

E

Summary Introduction

To select: Indentify the bond type which is equal in all aspects except YTM.

Introduction : The substitution swap is a type of bond which consist of all the properties of the genetic bond but differ from one property. Here the substitution swap is differ from the YTM value and other values are same.

F

Summary Introduction

To select: The bond which has a longest duration.

Introduction : The duration of bond is decided by the value of coupon rate and maturity period of the bond. Among all the longest duration bond has the low coupon rate and highest maturity period of bond. The maturity period is 15 years and 6% is coupon rate.

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