a. Janet Meer is a fixed-income portfolio manager. Noting that the current shape of the yield curve

Question:

a. Janet Meer is a fixed-income manager. Noting that the current shape of the yield curve is flat, she considers the purchase of a newly issued, option-free corporate bond priced at par; the bond is described in Table 11.9. Calculate the duration of the bond.
TABLE 11.6 Investment strategies (amounts are market value invested)

5-Year Maturity (Modified Duration = 4.83 Years) $5 million 15-Year Maturity (Modified Duration = 14.35 Years) 25-Year M

TABLE 11.7 Investment strategy assumptions
Market Value of Bonds __________________ $10 Million
Bond maturities ..................... 5 and 25 years or 15 years
Bond coupon rates .......................................... 0.00%
Target modified duration ................................ 15 years
TABLE 11.8 Instantaneous interest rate shift immediately after investment
Maturity _________________ Interest Rate Change
5 year ................................. Down 75 basis points
15 ................................................... Up 25 bp
25 ................................................... Up 50 bp
TABLE 11.9 7% option-free bond, maturity = 10 years

Change in Yields Up 10 Basis Points Down 10 Basis Points Price 9.29 100.71 35.00 Convexity

TABLE 11.10 7.25% option-free bond, maturity = 12 years
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
b. Meer is also considering the purchase of a second newly issued, option-free corporate bond, which is described in Table 11.10. She wants to evaluate this second bond's price sensitivity to an instantaneous, downward parallel shift in the yield curve of 200 basis points. Estimate the total percentage price change for the bond if the yield curve experiences an instantaneous, downward parallel shift of 200 basis points.

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