Question
A risk manager is concerned about the impact of yield changes on a $10 million par value position in Saragossa Industries bonds held by a
A risk manager is concerned about the impact of yield changes on a $10 million par value position in Saragossa Industries bonds held by a portfolio manager at his firm. The Saragossa bond has exactly 9 years until maturity, a 7% coupon with semiannual payments, and a yield to maturity of 11%. The risk managers policy is to use a 10 bps change in the yield to maturity to compute approximate modified duration and approximate convexity.
a. What are the approximate modified duration and approximate convexity of the Saragossa bond?
b. If the Saragossa bonds yield to maturity increases by 50 bps, what is the expected gain/loss (in dollars) in the portfolio managers position using money duration with adjustment for money convexity?
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