Janet Meer is a fixed-income portfolio manager. Noting that the current shape of the yield curve is

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Janet Meer is a fixed-income portfolio manager. Noting that the current shape of the yield curve is flat, she considers the purchase of a newly issued, 7% coupon, 10-year-maturity, option-free corporate bond priced at par. The bond has the following features:

a. Calculate the modified duration of the bond.

b. Meer is also considering the purchase of a newly issued, 7.25% coupon, 12-year-maturity option-free corporate bond. She wants to evaluate this second bond’s price sensitivity to a decline in interest rates. Using the following data, estimate the bond’s percentage price change if the yield curve shifts downward by 200 basis points.

c. Meer asks her assistant to analyze several callable bonds, given the expected downward parallel shift in the yield curve. Meer’s assistant argues that if interest rates fall enough, P-963 convexity for a callable bond will become negative. Is the assistant’s argument correct?

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ISE Investments

ISBN: 9781266085963

13th International Edition

Authors: Zvi Bodie, Alex Kane, Alan Marcus

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