Calculate the dollar duration and the dollar convexity of a three year zero coupon bond, yielding 5.5%pa nominal, assuming the bond has a face value of $100 and that interest accrues semi-annually.  Using dollar duration and dollar convexity estimate the new price of the bond if the yield curve shifts upwards by 50 basis points at all maturities.  

 

(b) Explain how reinvestment risk and interest rate risk are relevant to the following active management strategies: 

1. Butterfly strategies
2. Rich-cheap analysis
3. The rollover strategy
4. Riding the yield curve  

Answer rating: 100% (QA)

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