QUESTION $1[50$ MARKS$]$

As a Fixed Income Portfolio Manager, you would like to increase your exposure to an

identified underlying bond, namely a corporate bond issued by BNY Mellon, N$.$A$.$ The

issuer is rated AA by S&P Credit Rating Agency as AA$-.$ The proposed date of

settlement is scheduled on $31$

st December $2023.$ Details of the bond is described as

per below table $1.$

Table $1$: Details of BNY Mellon, N$.$A$.$ Bond Maturity $15$ July $2030$

Annual Coupon $5\mathrm{.}5\%$

Coupon Payment Frequency Annual

Interest Payment Dates $15$ June and $15$ December

Maturity Date $15$ December $2030$

Day Count Convention $30/360$

Annual Yield$-$to$-$maturity $6\mathrm{.}5\%$

$($a$)$ Calculate the intrinsic value of the bond to be settled on $31$st December $2023$

closest to and explain why the bond price is different from its nominal value?

$(10$ marks$)$

$($b$)$ Assuming a $50$ basis point change in the yield to maturity, calculate the

approximate effective duration for investment of USD$5$M$.$

$(10$ marks$)$

$($c$)$ What is the corresponding dollar duration for the bond based on an investment of

USD$5$M$?$

$(5$ marks$)$

$($d$)$ A bond currently being traded at $98\mathrm{.}10,$ has an approximate modified duration of

$8\mathrm{.}6907$ and approximate convexity of $107\mathrm{.}157.$ Calculate the estimated convexity$-$

adjusted percentage price change resulting from a $100$ basis points increase in the

yield to maturity.

$(10$ marks$)$

Page $3$ of $6$

$($e$)$ Other than the investment grade rating of the issuer by S&P Credit Rating Agency,

what other factors you will consider in your decision making process for buying the

bond?

$(9$ marks$)$

$($f$)$ Based on the relationship between interest rates and bond prices, critically explain

why you may still consider to invest in fixed income instruments despite rising

interest rate environment.