Assume two-year euro-note-what does convexity measure

Assignment Help Financial Management

Reference no: EM131047517

Assume a two-year Euro-note (pays coupon annually), $100,000 par value, an annual coupon rate of 10 percent and convexity of 2.7. If today’s YTM is 11.6 percent and term structure is flat, a. What does convexity measure? Why does convexity differ among bonds? What happens to convexity of bonds when interest rates rise? Why? b. What is the exact price change in dollars if interest rates increase by 10 basis points (a uniform shift)? c. Assume the Euro-note is the debt issue of the firm. How should the firm invest the proceeds of the debt issue such that its equity value is immunized against interest rate risk? (i.e. achieve equity dollar duration of zero supposing convexity is ignored). d. How long is the hedge in part (g) (i.e. the zero duration position) good for? Why? Explain.

Reference no: EM131047517

Questions Cloud

Bolding period return-definednas interest income plus : The returm an investor earns in a bond over a period of time is known as the bolding period return, definednas interest income plus or minus the change in the bonds price, all diveded by the beginning bond price a) what is the holding period return o..

Bonds on the market making annual payments : Essary Enterprises has bonds on the market making annual payments, with nine years to maturity, a par value of $1,000, and selling for $966. At this price, the bonds yield 6.8 percent. What must the coupon rate be on the bonds?

Vrobabilities for the four possible economic conditions : Four probable states of the economy may prevail next year. Below are the returns on the stocks of ABC and XYZ companies under each of the probable states and the probabilities for each state. Moderate Growth 20.00% -8.00% 22.00% Given the probabiliti..

What is the percentage change in the price of bond : Both Bond Sam and Bond Dave have 9 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has five years to maturity, whereas Bond Dave has 18 years to maturity. If interest rates suddenly rise by 2 percent, what is the perc..

Assume two-year euro-note-what does convexity measure : Assume a two-year Euro-note (pays coupon annually), $100,000 par value, an annual coupon rate of 10 percent and convexity of 2.7. If today’s YTM is 11.6 percent and term structure is flat, a. What does convexity measure? Why does convexity differ amo..

Offset the exchange risk associated with cost structure : Volkswagen almost went bankrupt in 1973 for all of the following EXCEPT it failed to offset the exchange risk associated with its cost structure and revenue structure with a suitable liability structure it gambled on the value of dollars it priced it..

Assume that the current market rate : Assume that the current market rate is 3 percent. Calculate the returns an provide all relevant factors to compare between the three alternative below: A 4 year gov bond initially sold to the public on the same date last year (the 1st coupon paid yes..

Sale securities and trading securities for year : On August 1, 2014, Dambro Company acquired 800, $1,000, 9% bonds at 97 plus accrued interest. The bonds were dated May 1, 2014, and mature on April 30, 2020, with interest paid each October 31 and April 30. Account for this bonds as Held to maturity ..

User Account

All Pages