Question
A corporate bond has a modified duration of 6.600 and an approximate convexity of 33.750. Assume that changes in its credit rating by the rating
A corporate bond has a modified duration of 6.600 and an approximate convexity of 33.750. Assume that changes in its credit rating by the rating agencies causes the bonds yield spread to increase or decrease. Please answer the following questions.
What would be the price impact of a 50bps increase in its spread over the benchmark, ignoring convexity? Be sure to indicate if it is a price increase or decrease.
What would be the price impact of a 75 bps decrease in its spread over the benchmark, ignoring convexity. Be sure to indicate if it is a price increase or decrease.
What would be the price impact of a 175 bps increase in spread over the benchmark. Include the convexity correction.
What would be the price impact of a 175 bps decrease in spread over the benchmark. Include the convexity correction.
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Valuation Workbook
Authors: Tim Koller, Marc Goedhart, David Wessels, Jeffrey P. Lessard, McKinsey & Company
4th Edition
0471702161, 978-0471702160
