Question
Step Up Note Question A 5-year step-up note is issued which pays out semi-annual coupons. The coupon rate begins at 1.65% and goes up by
Step Up Note Question
A 5-year step-up note is issued which pays out semi-annual coupons. The coupon rate begins at 1.65% and goes up by 0.25% or 25 basis points each year. The issue sells at $94.25 and par value is $100.
1) Find the Yield to Maturity (YTM) of this step-up note.
2) Estimate the duration and convexity of the step-up note using a 0.2% (or 20 basis points) rate shock.
3) On the same graph, For yields within the range of 0% to 8% which have a step of 0.1%, plot the estimation error of the note price using duration & convexity and duration only (with respect to the exact price change)
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