The Francesca Finance Corporation has issued a bond with the following characteristics: Maturity25 years Coupon9% Yield to
Question:
The Francesca Finance Corporation has issued a bond with the following characteristics:
Maturity—25 years Coupon—9%
Yield to maturity—9%
Callable—after 3 years @ 109 Duration to maturity—8.2 years Duration to first call—2.1 years
a. Discuss the concept of call-adjusted duration and indicate the approximate value (range) for it at the present time.
b. Assuming interest rates increase substantially (i.e., they increase to 13%), discuss what will happen to the calladjusted duration and the reason for the change.
c. Assuming interest rates decline substantially (i.e., they decline to 4%), discuss what will happen to the bond’s call-adjusted duration and the reason for the change.
d. Discuss the concept of negative convexity as it relates to this bond.
Step by Step Answer:
Investment Analysis And Portfolio Management
ISBN: 9780176500696
1st Canadian Edition
Authors: Frank K. Reilly, Peggy L. Hedges, Philip Chang, Keith C. Brown, Hedges Reilly Brown