Question
Please do everything ASAP. I will give you a good rating. Please answer all parts as per my guideline. Do not touch if you won't
Please do everything ASAP. I will give you a good rating. Please answer all parts as per my guideline. Do not touch if you won't answer everything. You don't have to explain just mention the correct answer.
Part 1
Which statement is the best description of the relationship between a bond's price and its yield?
As the yield rises the price rises for high coupon bonds and falls for low coupon bonds.
As the yield rises the price falls.
As the yield rises the price rises.
As the yield rises the price rises for low coupon bonds and falls for high coupon bonds.
Part 1b
For a 5% coupon bond, it is the most sensitive to movements in yield with a __________ maturity.
10-year
5-year
1-year
2-year
Part 2.
If the modified duration of a bond is 2.3, whats the best interpretation?
1% change in yield means a $2.3 change in price.
1% change in yield means a 2.3% change in coupon rate.
1% change in yield means a $2.3 change in coupon rate.
1% change in yield means a 2.3% change in price.
Part 2b
Which of the following statements on convexity is correct?
When yields move down, positive convexity will reduce the increase in the price of the bond.
Convexity is more useful for small changes in interest rate but has less impact on large changes in interest rate.
When yields move up, positive convexity will reduce the decrease in the price of the bond.
Bonds with longer term to maturity have lower convexity.
Part 3
Use the same set of data to answer questions 3a-3c. Complete your calculation in Excel.
Par value | $100.00 |
Coupon rate | 4% |
Frequency | 2 per year |
Yield-to-maturity | 6% |
Term to maturity | 3 years |
3a.
Whats the price of the bond?
$97.62
$106.81
$102.74
$94.58
3b.
Whats the Macaulay duration of the bond?
2.85 years
2.67 years
2.43 years
2.15 years
3c.
If the yield increases by 1%, how will the duration and convexity impact the bond price?
The price will decrease by $4.75.
The price will decrease by $2.58.
The price will increase by $3.42.
The price will increase by $5.44.
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