6. A hedge fund specializes in investments in emerging market sovereign debt. The fund manager believes...

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6. A hedge fund specializes in investments in emerging market sovereign debt. The fund manager believes that the implied default probabilities are too high, which means that the bonds are viewed as "cheap" and the credit spreads are too high. The hedge fund plans to take a position on one of these available bonds. Time-to Maturity Coupon Rate Price 10 years 10% 20 years 10% 30 years 10% Bond (A) (B) (C) Yield-to Maturity 58.075279 51.304203 20% 50.210636 20% The coupon payments are annual. The yields-to-maturity are effective annual rates. The prices are per 100 of par value. 20% a. Compute the approximate modified duration of each of the three bonds using a 50 bp change in the yield-to-maturity and keeping precision to six decimals (because approximate duration statistics are very sensitive to rounding). b. Calculate the approximate convexity for each bond Show your work c. Which of the three bonds is expected to have the highest percentage price increase if the yield-to-maturity on each decreases by the same amount- for instance, by 50 bps from 20% to 19.50%? 6. A hedge fund specializes in investments in emerging market sovereign debt. The fund manager believes that the implied default probabilities are too high, which means that the bonds are viewed as "cheap" and the credit spreads are too high. The hedge fund plans to take a position on one of these available bonds. Time-to Maturity Coupon Rate Price 10 years 10% 20 years 10% 30 years 10% Bond (A) (B) (C) Yield-to Maturity 58.075279 51.304203 20% 50.210636 20% The coupon payments are annual. The yields-to-maturity are effective annual rates. The prices are per 100 of par value. 20% a. Compute the approximate modified duration of each of the three bonds using a 50 bp change in the yield-to-maturity and keeping precision to six decimals (because approximate duration statistics are very sensitive to rounding). b. Calculate the approximate convexity for each bond Show your work c. Which of the three bonds is expected to have the highest percentage price increase if the yield-to-maturity on each decreases by the same amount- for instance, by 50 bps from 20% to 19.50%?

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a Compute the approximate modified duration of each of the three bonds using a 50 bp change in the ... View the full answer