Hello, can someone please help me solve this problems..... Suppose you just purc
ID: 2645136 • Letter: H
Question
Hello, can someone please help me solve this problems.....
Suppose you just purchased a 15-year bond with an 8% annual coupon when market yields were also 8%. As it turns out, this bond has a modified duration of 9.24 and a convexity of 52.37. Imagine that a moment after you purchased the bond, market yields suddenly increased to 9%.
1 Using duration alone, what price would you predict for this bond immediately following the increase in yields?
A$1,000
B$1,214.57
C$907.60
D$845.76
2) Now, using both duration and the convexity adjustment together, what price would you predict for this bond immediately following the increase in yields?
A$910.20
B$974.23
C$981.45
D$1,110.91
3) Finally, using a financial calculator, determine the true price of the 15-year, 8% coupon bond when the market yield is 9%.
A$1,012.71
B$855.10
C$919.39
D$1,000
Explanation / Answer
Answer to question 3.
Option c $919.39
Calculation chart
Answer to question 1.
Option b $1,214.57
Bond Price $1,000.00 $919.39 If Yield Changes By 1.00% Face Value 1,000 1000 Bond Price Will Change By -80.61 Coupon Rate 8.00% 8% Life in Years 15 15 Modified Duration Predicts -85.59 Yield 8.00% 9% Convexity Adjustment 5.23 Frequency 1 1 Total Predicted Change -80.37 Macaulay Duration 9.24 Actual New Price $919.39 Modified Duration 8.56 Predicted New Price $919.63 Convexity 104.53 Difference $0.24 Period Cash Flow PV Cash Flow Duration Calc Convexity Calc 0 ($1,000.00) 1 80.00 74.07 74.07 127.01 2 80.00 68.59 137.17 352.81 3 80.00 63.51 190.52 653.36 4 80.00 58.80 235.21 1,008.27 5 80.00 54.45 272.23 1,400.38 6 80.00 50.41 302.48 1,815.30 7 80.00 46.68 326.75 2,241.12 8 80.00 43.22 345.77 2,667.99 9 80.00 40.02 360.18 3,087.96 10 80.00 37.06 370.55 3,494.60 11 80.00 34.31 377.42 3,882.89 12 80.00 31.77 381.23 4,248.95 13 80.00 29.42 382.41 4,589.92 14 80.00 27.24 381.32 4,903.76 15 1,080.00 340.46 5,106.92 70,053.71Related Questions
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