You are given a bond with a yield to maturity of 16%, Macaulay duration of 12 and a convexity of 52. Given this information, give a more accurate estimate of the percentage price change if yields increase by 2%. (Choose the closest answer) O A. The price is estimated to decrease by 22.96% O B. The price is estimated to decrease by 20.69% O C. The price is estimated to decrease by 19.65% O D. The price is estimated to decrease by 24%

You are given a bond with a yield to maturity of 16%, Macaulay duration of 12 and a convexity of 52. Given this information, give a more accurate estimate of the percentage price change if yields increase by 2%. (Choose the closest answer) O A. The price is estimated to decrease by 22.96% O B. The price is estimated to decrease by 20.69% O C. The price is estimated to decrease by 19.65% O D. The price is estimated to decrease by 24%

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 20P

See similar textbooks

Similar questions

Suppose there is a large probability that L will default on its debt. For the purpose of this example, assume that the value of Ls operations is 4 million (the value of its debt plus equity). Assume also that its debt consists of 1-year, zero coupon bonds with a face value of 2 million. Finally, assume that Ls volatility, , is 0.60 and that the risk-free rate rRF is 6%.
A bond for the Chelle Corporation has the following characteristics: Maturity - 12 years Coupon - 10% YTM - 9.5% Macaulay duration - 5.7 years Convexity – 48 Noncallabe Calculate the approximate price change for this bond using both duration and convexity in the computation, one again assuming that its yield to maturity decline by 300 basis points.
A 6% coupon bond with semiannual coupons has a convexity (in years) of 120, sells for 80% of par, and is priced at a yield to maturity of 8%. If the YTM increases to 9.5% what is the predicted contribution of convexity to the percentage change in price due to convexity?
Please answer the following question: The modified duration and convexity of a 6%, 25 year bond selling toyield 9% is 10.62 and 91.46 respectively. If the required yield increasesby 300 basis points from 9% to 12% what is the approximate percentagechange in the price of the bond due toa) duration,b) convexity,c) duration and convexity?d) If the actual change is -26.50%, compare your results from a) and c)which provides a better approximation?
A newly issued bond with 1 year to maturity has a price of $1,000, which equals its face value. The coupon rate is 15% and the probability of default in 1 year is 35%. The bond’s payoff in default will be 65% of its face value. a. Calculate the bond’s expected return. b. Use a data table to show the expected return as a function of the recovery percentage and the price of the bond. Please show how you got part B using all functions.
Suppose you observe the following effective annual zero-coupon bond yields: 0.030 (1-year), 0.035 (2-year), 0.040 (3-year), 0.045 (4-year), 0.050 (5-year). For each maturity year compute the zero-coupon bond prices, continuously compounded zero-coupon bond yields, the par coupon rate, and the 1-year implied forward rate. Show work and discuss your result. Briefly discuss who uses Zero coupon bonds and why?
Consider a $100 par value bond that has an 8% coupon rate, pays a semi-annual coupon, matures 2 years from today, and is priced to yield 6%. Calculate the Macauly and modified durations as a present value weighted average of the time to maturity. For the bond above, calculate the dollar duration and the price value of a basis point. For the bond above, estimate the percent and dollar price changes associated with a 0.5% increase in yield.
Consider a semi-annual bond that has a par value of 100, a 15-year maturity, a 5% coupon rate. Monthly interest rate is 0.412%. (a) Calculate the annualized semi-annual compounding yield. (b) What is the price of the bond (without calculation)? And explain why you can determine the price of the bond without calculation? (c) Using answers from (b), calculate the modified duration of this bond. (d) Using answers from (b) and (c), suppose that the bond’s yield to maturity decreases to 3.5%. How much will the bond price increase by applying the duration rule? (e) Do you agree with the following statement, and explain why? “If two bonds have the same duration, then the percentage change in price of the two bonds will be the same for a given change in interest rates.” (f) Discuss the problems with the traditional bond pricing approach by using the yield to maturity. (300 words Maximum)
You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT? State your reason for the answer. The price of Bond A will decrease over time, but the price of Bond B will increase over time. The price of Bond B will decrease over time, but the price of Bond A will increase over time. The prices of both bonds will remain unchanged. The prices of both bonds will increase by 7% per year. The prices of both bonds will increase by 9% per year.
What is the duration of a three-year, $1,000 Treasury bond with a 12 percent semiannual coupon selling at par? Selling with a yield to maturity of 6 percent? 8 percent? Plot the relationship. What can you conclude about the relationship between duration and yield to maturity? Select one: a. Both the maturity periods have equal duration. b. When the yield to maturity is increasing the years to maturity will decrease. c. There is no relationship d. None of the other three answers are correct
Consider the following figure which shows the relationship between a three-year bond’s price (vertical axis) and the passage of time (measured in years - horizontal axis). Which of the following statements are consistent with the figure above? Group of answer choices A. This bond pays a coupon of $6. B. This pattern of prices is consistent with a bond whose yield to maturity is below the bond’s coupon rate. C. None of the other statements are correct. D. This bond pays coupons on a quarterly basis.
A bond has a Macaulay duration of 12.00 and is priced to yield 10.0%. If interest rates go up so that the yield goes to 10.5%, what will be the percentage change in the price of the bond? Now, if the yield on this bond goes down to 9.5%, what will be the bond's percentage change in price? Comment on your findings.