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1. a. A 5% coupon bond paying interest annually has a modified duration of 7.5 years, sells for $900, and is priced at a
1. a. A 5% coupon bond paying interest annually has a modified duration of 7.5 years, sells for $900, and is priced at a yield to maturity of 8%. If the YTM increases to 10%, what is the predicted change in price based on the bond's duration? b. A 5% coupon bond has a convexity (in years) of 76, sells for 90% of par, and is priced at a yield to maturity of 8%. If the YTM increases to 10%, what is the predicted contribution of convexity to the estimated percentage change in price? What is the total predicted price drop due to duration and convexity? c. A bond with annual coupon payments has a coupon rate of 6%, yield to maturity of 5%, and Macaulay's duration of 12.4 years. What is the bond's modified duration? d. When interest rates decline, the duration of a 30-year noncallable bond selling at a premium: i. Decreases. ii. Increases. iii. Remains the same. iv. Increases at first, then declines. e. If a bond manager swaps a bond for one that is identical in terms of coupon rate, maturity, and credit quality but offers a higher yield to maturity, the swap is: i. An interest rate anticipation swap ii. A substitution swap. iii. A tax swap iv. An intermarket spread swap f. All else equal, which bond has the longest duration? i. 8-year maturity, 6% coupon ii. 8-year maturity, 11% coupon iii. 15-year maturity, 6% coupon iv. 15-year maturity, 11% coupon
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