In relation to a convertible arbitrage trade in general, carefully explain what is meant by the convertible bond's two convexities and how these convexities affect the hedging choices of the portfolio manager.
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- Contrast the Nasdag and National Market System with the OTCBB. Describe the conversion priviege on a convertible security. Explain how the market price of the underiying common stoc affects the market price of a comvertible bond (Wote, Your the page may be in this forman)Which one of the following attributes is favorable for the convertible bond arbitrage? low convexity high conversion premium low implied volatility high duration ow stock price volatilityThe theoretical floor value for a convertible bond is its A. pure bond value. B. onversion price. C. conversion value. D. par value.
- What is a convertible bond? If a company decidesto raise capital by issuing convertible bonds, howwould the terms on the bond be set? Considerspecifically the maturity, coupon rate, and callfeatures of the bond, as well as the conversionprice (or conversion ratio), together with any otherparameters required for the analysis.Explain the principle of immunization when used with a bond portfolio. What is bond portfolio immunization attempting to achieve? How is bond portfolio immunization achieved? Which two (2) bond risk components interact to make immunization successful? Explain how these bond risk components interact to immunize a bond portfolio as interest rates change.What are the advantages and disadvantages of convertibles to issuers? To investors?
- Explain the principle of immunization when used with a bond portfolio. a. What is bond portfolio immunization attempting to achieve? b. How is bond portfolio immunization achieved? c. Which bond risk components interact to make immunization successful? i. Explain how these bond risk components interact to immunize a bond portfolio.Explain the principle of immunization when used with a bond portfolio. What is bond portfolio immunization attempting to achieve? How is bond portfolio immunization achieved? Which bond risk components interact to make immunization successful? Explain how these bond risk components interact to immunize a bond portfolio.Explain and contrast the two approaches an investment bank could take to creating a principle protected structured product: the bond plus option approach and Constant Proportion Portfolio Insurance.
- Consider a security that pays income to its holders (e.g., a dividend-paying stock, or acoupon bond). Should the forward price of this security (for a contract that matures attime T), F0,T, be higher than, lower than, or equal to the security's current spot price?Why?.Discussthe problems with the traditional bond pricing approach by using the yield to maturity.
