Question
Suppose settlement is on a coupon payment date, so / = 0. For a 10-Year, 6% annual payment bond with face value =$100. Assume the
Suppose settlement is on a coupon payment date, so / = 0. For a 10-Year, 6% annual payment bond with face value =$100. Assume the yield-to-maturity is = 5%.
Suppose we have a small interest rate (yield) move: = +0.01%. Calculate the new bond price + for + = + = 5.01% . Then calculate the price change: = + 0 . Finally, use Duration and Convexity calculated in part a to approximate the price change . Which approximation is closer to the real ? You should simply follow the steps below:
1. + = ( = 100, = 6%, = 10, = 5.01%) = _____________.
2. = + 0 = ______________ ______________ = ______________.
3. 1 = 0 = (+0.01%) ______________ ______________ = ______________. Page 2 of 3
4. 2 = 1 + 1 2 () 2 0 = ______________ + 0.5 (0.01%) 2 ______________ ______________ = ______________.
5. ______________ (choose 1 or 2) is closer to .
Suppose we have a small interest rate (yield) move: Ar = +0.01%. Calculate the new bond price P+ for r+ = r + Ar = 5.01%. Then calculate the price change: AP = P+ Po. Finally, use Duration and Convexity calculated in part a to approximate the price change AP. Which approximation is closer to the real AP? You should simply follow the steps below: 1. P+ = bondprice(par = 100,coupon = 6%, Mat = 10, yield = 5.01%) = 2. AP = P7 P. = 3. APA = -Ar. Po Duration = -(+0.01%) Page 1 of 3 4. AP2 = AP2 +* (Ar)2. Po. Convexity = +0.5 x (0.01%)2 x 5. (choose AP, or AP2) is closer to AP. Suppose we have a small interest rate (yield) move: Ar = +0.01%. Calculate the new bond price P+ for r+ = r + Ar = 5.01%. Then calculate the price change: AP = P+ Po. Finally, use Duration and Convexity calculated in part a to approximate the price change AP. Which approximation is closer to the real AP? You should simply follow the steps below: 1. P+ = bondprice(par = 100,coupon = 6%, Mat = 10, yield = 5.01%) = 2. AP = P7 P. = 3. APA = -Ar. Po Duration = -(+0.01%) Page 1 of 3 4. AP2 = AP2 +* (Ar)2. Po. Convexity = +0.5 x (0.01%)2 x 5. (choose AP, or AP2) is closer to APStep by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started