User Account

All Pages

Bond duration-interest rate risk

Assignment Help Business Management
Reference no: EM131572031

Bond Duration, Interest Rate Risk, Immunization and Convexity

Consider a non-callable bond with 5 years to maturity and an annual coupon of 4%. The bond yields 3% and you may assume that the yield will remain constant throughout the holding period.

a. What price should you be willing to pay for this bond?

b. What is the (Macaulay) duration of the bond? What is the modified duration of the bond?

c. Use modified duration to estimate the new market value of the bond, should bond market yields increase by 0.50% (i.e. 50 basis points).

d. Assume the convexity of the bond is 25.568.Now, using the duration plus convexity estimate, what is your estimate of the market value of the bond upon a 0.50% yield increase?

e. Suppose your institution issued this bond, but, using available current assets, wants to temporarily immunize against interest rate risk by acquiring zero-coupon bonds as assets. You can assume that these zero-coupon bonds have similar yields. What portfolio weights would you require to construct an immunizing portfolio comprised of 1-year and 7-year zero coupon bonds?

f. Why is convexity the bondholder's friend?

Reference no: EM131572031

Questions Cloud

What was the rate of return on this investment : Assume that in 2009, a Morgan silver dollar minted in 1895 sold for $8,650. What was the rate of return on this investment?
What is a break-even point and how do you calculate it : What is a break-even point? How do you calculate it? How do you compute Unit Variable Cost (UVC)? How do you compute total cost (TC)?
Deposited in the account at retirement : If the payments are made over 20 years, what amount (approximately) must be deposited in the account at retirement?
The probability distribution of a less risky return : The probability distribution of a less risky return is more peaked than that of a riskier return. What shape would the probability distribution have for:
Bond duration-interest rate risk : The bond yields 3% and you may assume that the yield will remain constant throughout the holding period.
Which stock do you think has higher standard? deviation : The? first, shown in Panel? A, is Cyclical Industries Incorporated. Which stock do you think has a higher standard? deviation? ?Why?
Find the mass of n2 that has leaked : Find the mass of N2 that has leaked. Assume that N2 can be treated as an ideal gas. The molar mass of N2 is M = 28 g/mole and R = 8.314 J/mole K.
Do all health care institutions have the same structure : Do all health care institutions have the same structure? If so, what factors contribute to the lack of consistency within health care institutions?
Determining the option strategies : Assume AMZN has a nearly constant volatility (i.e. s) of 28% and a market value of $968 per share. Estimate of the cost a 1-year

Reviews

Write a Review

Business Management Questions & Answers

  When would it be appropriate to use each presentation method

What are the differences between the four methods for delivering oral presentations? When would it be appropriate to use each presentation method? What is an informative presentation?

  Provide an example of a key term shown in the book margins

Provide an example of a key term shown in the book margins from Chapters 3 -5. Look at the discussion questions at the end of the chapter sections and find an article that helps you answer a question that is posed.

  Executive compensation in a nonprofit organization

Suppose you are a part of the Board of Directors for a non-profit organization. A new executive director has just been employed. The previous executive director received a payment and no variable pay.

  What are the main costs of errors in healthcare

What are the main costs of errors in healthcare? What are strategies for improvement?

  Money it can afford to spend on advertising

When a retailer chooses to use all the money it can afford to spend on advertising, the retailer is using which method to determine its advertising budget?

  Suggest a password policy for no-internal-controls

Suggest a password policy for No-Internal-Controls. Include an example of a technical control and an administrative control.

  Evaluate the success potential of key economic goals

Evaluate the success potential of key economic goals in terms of populations covered, services included, financing arrangements, reimbursement strategies, and economic competition policies.

  Prestigious management consulting firm

Upon graduation from University, you have a joined a prestigious management consulting firm.

  Current portfolio of hurricane policies

The credit rating of the reinsurance company should not be of any concern to Insurance Company X. This is because insurance companies are well capitalized. (t/f)

  What is global consumer culture positioning

What is global consumer culture positioning (GCCP)? What other strategic positioning choices do global marketers have?

  Explain the fair approach to evaluating ethical business

Discuss the Formula for Credibility and write about the key aspects of Competence, Caring, and Character. Explain the FAIR approach to evaluating ethical business communications.

  Analyze effects you believe internets capabilities will have

BUS 499- Explain the effects you believe the Internet's capabilities will have on the brands you identified in the previous discussion and what the owner of the brand should do in light of them.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd