A treasury bond has maturity T = 10Y and pays at the end of each year...
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A treasury bond has maturity T = 10Y and pays at the end of each year a coupon of $5.00 on a face value of $100. The risk-free interest rate for all maturities is 4.0% with continuous compounding. The bond face value (notional) is $100. i) compute the price of the bond. ii) compute the duration and convexity of the bond. ¹More precisely: the UK Financial Conduct Authority will stop publishing the 3-month, 6-month and 1-year USD Libors after 30-Jun-2023. 1 iii) Suppose that the risk-free interest rate increases to 5%. Recalculate the bond price and compare with the result of the duration-convexity approximation P(r + 8r) = P(r) (1 - D(r) - 8r + C(r)(sr)²) Compare the bond price obtained from this approximation with the exact bond price. How precise is the approximation? (1) A treasury bond has maturity T = 10Y and pays at the end of each year a coupon of $5.00 on a face value of $100. The risk-free interest rate for all maturities is 4.0% with continuous compounding. The bond face value (notional) is $100. i) compute the price of the bond. ii) compute the duration and convexity of the bond. ¹More precisely: the UK Financial Conduct Authority will stop publishing the 3-month, 6-month and 1-year USD Libors after 30-Jun-2023. 1 iii) Suppose that the risk-free interest rate increases to 5%. Recalculate the bond price and compare with the result of the duration-convexity approximation P(r + 8r) = P(r) (1 - D(r) - 8r + C(r)(sr)²) Compare the bond price obtained from this approximation with the exact bond price. How precise is the approximation? (1)
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