Consider a bond with 6% coupon paid semi-annually and 3 years to maturity. The yield on this bond is 5% and investor buys it at 102.75 ponds. The investor intends to hold this bond for 2.5 years but has been told that the forward interest rates in year 2 are expected to drop to 4% and then increase to 4.75% in year 3.

a)

Calculate the coupon income, re-investment income, price appreciation/depreciation from this bond over the holding period, and its holding period return (HPR).

b)

What is duration of this bond?

c)

What is convexity of this bond?

d)

If there is an identical bond to the one in this question, but with 6 years to maturity

instead of 3 years, would its duration be double? Explain without calculations.

Answer rating: 100% (QA)

a Calculation of coupon income reinvestment income price appreciationdepreciation and holding period return HPR Coupon Income The bond has a 6 coupon ... View the full answer