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Calculate the approximate percentage changes

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Question - Bonds A and B have macaulay durations of 4.5 years and 5 years respectively. Both bonds have a convexity of 120 and currently sell at par. you expect interest rates to fall by approximately 0.80% to 9.2% in a couple of days.

(a) Given your interest rate expectations which one bonds A and B would you prefer? Why?

(b) Calculate the approximate percentage changes in the values of both bonds if your expectations are realised.

(c) If your investment horizon is 5 years, which of the two bonds would you hold to ensure that you are fully immunised from interest rate changes? Why?

Reference no: EM132948151

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