Consider that you have in your portfolio a 3-year 3% coupon bond with face value of...
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Consider that you have in your portfolio a 3-year 3% coupon bond with face value of $100. The coupons of this bond are paid semi-annually. We assume that the current yield to maturity on the bond is 4% per annum with continuous compounding. a. (10 points) Could you please first describe the two concepts of bond duration and convexity? Then, please compute the duration and the convexity of the bond described above? b. (10 points) You expect a steepening of the interest rates yield curve very soon, either through a bull steepening or a bear steepening. Could you please first define these two market phenomena and then propose strategies taking advantage of such market environments given your existing portfolio? Consider that you have in your portfolio a 3-year 3% coupon bond with face value of $100. The coupons of this bond are paid semi-annually. We assume that the current yield to maturity on the bond is 4% per annum with continuous compounding. a. (10 points) Could you please first describe the two concepts of bond duration and convexity? Then, please compute the duration and the convexity of the bond described above? b. (10 points) You expect a steepening of the interest rates yield curve very soon, either through a bull steepening or a bear steepening. Could you please first define these two market phenomena and then propose strategies taking advantage of such market environments given your existing portfolio?
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Answer rating: 100% (QA)
Solution a Duration and Convexity Duration is a measure of the sensitivity of a bonds price to changes in interest rates It is the weighted average of the time to maturity of the bonds cash flows wher... View the full answer
Related Book For
Corporate Finance
ISBN: 9781265533199
13th International Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
Posted Date:
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