A government bond that trades in the market has the following characteristics: . Remaining life ....

 

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A government bond that trades in the market has the following characteristics: . Remaining life . Coupon rate Coupon frequency YTM 5-years 4.0% Annual Question 2 3.0% Please answer the following questions: a. Estimate the bond price [5p] b. Estimate the new bond prices in case yields increase by 1% or decrease by 1%. Discuss the results [10p] c. The Macaulay and modified duration [10p] d. The Convexity [5p] Note: Duration and convexity could be estimated using one of the following approaches: Analytical, formula, or approximate. Consider the following two Treasury securities: Bond A: Price $110.00, modified duration (in years) 6.2 Bond B: Price $64.00, modified duration (in years) 9.5 a. Estimate the dollar price change and the price volatility of the two bonds for a 50 basis points (0.50%) change in the yield. Which bond is considered as more volatile and why? [15p] b. What are the limitations of using duration as a measure of a bond's price sensitivity to interest-rate changes? [10p] A government bond that trades in the market has the following characteristics: . Remaining life . Coupon rate Coupon frequency YTM 5-years 4.0% Annual Question 2 3.0% Please answer the following questions: a. Estimate the bond price [5p] b. Estimate the new bond prices in case yields increase by 1% or decrease by 1%. Discuss the results [10p] c. The Macaulay and modified duration [10p] d. The Convexity [5p] Note: Duration and convexity could be estimated using one of the following approaches: Analytical, formula, or approximate. Consider the following two Treasury securities: Bond A: Price $110.00, modified duration (in years) 6.2 Bond B: Price $64.00, modified duration (in years) 9.5 a. Estimate the dollar price change and the price volatility of the two bonds for a 50 basis points (0.50%) change in the yield. Which bond is considered as more volatile and why? [15p] b. What are the limitations of using duration as a measure of a bond's price sensitivity to interest-rate changes? [10p]

Answer rating: 100% (QA)

Solution a Estimate the bond price The bond price can be estimated using the following formula Price Present Value of Coupon Payments Present Value of Principal Payment Price Coupon Rate x Face Value ... View the full answer