Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

please show the workings Problem 3 (9 points): The price of a risky 1C-year zero-coupon bond depends on two parameters: risk-free 10-year spot rate f(10)

please show the workings
image text in transcribed
Problem 3 (9 points): The price of a risky 1C-year zero-coupon bond depends on two parameters: risk-free 10-year spot rate f(10) (to simplify notations, denote f(10) by r), and the risk factor s and it is given by P(r,s) = $1,000,000 Today r-0.05 and s=0.12, so, (1+0.5r+2rs)20 P(r,s) = $1,000,000 (1+0.5.0.05+2.0.05-0.12)20 = $483,531.61. You want to estimate the change in the bond price using first-order Taylor series approximation, i.e., write the change in price AP as a linear function of the change in interest rate Ar and risk factor As as AP=A*Ar+B*As, where A and B are some constants. a) (5 points) Find A and B. Round to the nearest integer number. b) (2 points) Using the original price function, P(r.s) = $1,000,000 (1+0.5r+2rs)20) if the risk factor increases by 0.01, by how much the interest rate should change to keep the price unchanged? c) (2 points) Using the Taylor series approximation, if the risk factor increases by 0.01, how much the interest rate should change to keep the price unchanged

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

Accounting The Basis For Business Decisions

Authors: Robert F. Meigs, Mary A. Meigs, Mark Bettner, Ray Whittington

10th Edition

0070433607, 978-0070433601

More Books

Students also viewed these Accounting questions

Question

4.3 Describe the job analysis process and methods.

Answered: 1 week ago