Question
We may parallel-shift the on-the-run yield curve by either 10 basis points (bps) or -10 bps. With a shift of 10 bps, the resulted binomial
We may parallel-shift the on-the-run yield curve by either 10 basis points (bps) or -10 bps. With a shift of 10 bps, the resulted binomial tree is in Table I below. With a shift of -10 bps, the resulted binomial tree is in Table II below. The bond is 3-year $100 par value coupon rate of 7% payable annually callable at $100.5 and at par in Year 1 and Year 2 from now, respectively. The OAS on this bond is 75 bps. The bond price before any yield shift is $100.25. Calculate the effective duration and effective convexity of this bond.
Interest rate r0 r1,H r1,L (in %) 5.1 ,7.1747 ,5.1067 Interest rate r2,HH r2,HL r2,LL (in %) 9.8899 ,7.0393, 5.0104 Table I
Interest rate r0 r1,H r1,L (in %) 4.9, 6.9391 ,4.9391 Interest rate r2,HH r2,HL r2,LL (in %) 9.6095, 6.8398, 4.8684
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