Question
Bond ROUGE is a 3-year bearing coupon bond of 11% per year with a face value of $1,000. Coupon payments of $110 are made every
Bond ROUGE is a 3-year bearing coupon bond of 11% per year with a face value of $1,000. Coupon payments of $110 are made every 12 months.
Suppose that the yield on the TSIR is 4% per annum with continuous compounding.
a) Calculate the bonds price, duration & convexity.
b) Regarding TSIR: explain the meaning of duration this time.
c) How would you price the bond ROUGE if the yield curve fell down 100 basis points (continuous compounding)?
d) And if you include in the calculus the effect of convexity of the bond, Will the change in price be greater or lower than the calculated in c)? Explain it with a graphic.
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