Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1. Consider a 30-year 3% coupon bond with semi-annual coupon payments. Currently, the price of the bond is $337.47. Based on the current yield to

1. Consider a 30-year 3% coupon bond with semi-annual coupon payments. Currently, the price of the bond is $337.47. Based on the current yield to maturity, the bond has a duration of 12.2 years and convexity of 233.2 year2. Calculate the following for this bond:a) Yield-to-maturity (YTM).b) Modified duration.c) Using modified duration only, estimate the percentage change in bond price when YTM goes DOWN by 2%.d) Using modified duration AND convexity, estimate the percentage change in bond price when YTM goes DOWN by 2%.e) Now calculate the actual price of the bond with the YTM decreasing by 2%. What is the actual percentage change in bond value? f) Now compare your answers in part c) and d): which method leads to a more accurate estimate on the bonds value change?

2. A financial analyst wants to estimate the modified duration and convexity of a 30-year 3% bond trading at par, using numerical approximation. Follow her steps below to compute the modified duration and convexity of this bond (assuming the bond pays coupons annually). a) Calculate the bond price if yield-to-maturity goes UP and goes DOWN by 20 basis point.b) Using numerical approximation, estimate the modified duration of this bond.c) Using numerical approximation, estimate the convexity of this bond.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Markets And Institutions

Authors: Anthony Saunders, Marcia Cornett

8th Edition

1264098723, 978-1264098729

More Books

Students also viewed these Finance questions