Bond Pricing, Duration, and Convexity

Face Value 1000 and pay semiannually

1. Using the following data from Sept. 2, 2021, plot (graph) the corporate A-rated yield and Treasury yield curves and calculate the default premium spread (in basis points) for each instrument.

a) 2 year corporate with a yield of 3.40% and treasury with a 0.21% yield

b) 5 year corporate with a yield of 3.60% and treasury with a 0.77% yield

c) 10 year corporate with a yield of 3.90% and treasury with a 1.29% yield

d) 20 year corporate with a yield of 4.80% and treasury with a 1.59% yield

Table 1 2 yr 5 yr 10 yr 20 yr Q1 Default Spread (b.p.) Q2 Price Q3a M. Duration Q3b Convexity Q4a Dur. Approx Q4b Conv. Approx Q4c Actual Q5 Treasury $ Figure 1 Example Corp A and Treasury Yield Curves Yield to Maturity 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 0 5 20 25 10 15 Time to Maturity Treasury -Corp. A Table 1 2 yr 5 yr 10 yr 20 yr Q1 Default Spread (b.p.) Q2 Price Q3a M. Duration Q3b Convexity Q4a Dur. Approx Q4b Conv. Approx Q4c Actual Q5 Treasury $ Figure 1 Example Corp A and Treasury Yield Curves Yield to Maturity 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 0 5 20 25 10 15 Time to Maturity Treasury -Corp. A