Janet Meer is a fixed-income portfolio manager. Noting that the current shape of the yield curve is
Question:
a. Calculate the modified duration of the bond.
b. Meer is also considering the purchase of a newly issued, 7.25% coupon, 12-year maturity option-free corporate bond. She wants to evaluate this second bonds price sensitivity to an instantaneous, downward parallel shift in the yield curve of 200 basis points. Based on the following data, what will be its price change in this yield-curve scenario?
Original issue price Par value, to yield 7.25%
Modified duration (at original price) ............ 7.90
Convexity measure .................. 41.55
Convexity adjustment (yield change of 200 basis points) ... 1.66
c. Meer asks her assistant to analyze several callable bonds, given the expected downward parallel shift in the yield curve. Meers assistant argues that if interest rates fall enough, convexity for a callable bond will become negative. Is the assistants argumentcorrect?
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