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Question: Pleas show formulas and caluculations for each step.
A bond for the Chelle Corporation has the following characteristics:
Maturity-12 years
Coupon-10%
Yield to maturity-9.50%
Macaulay duration-5.7 years
Convexity-48
Noncallable
a. Calculate the approximate price change for this bond using only its duration, assuming its yield to maturity increased by 150 basis points. Discuss (without calculations) the impact when you include the convexity effect.
b. Calculate the approximate price change for this bond (using only its duration) if its yield to maturity declined by 300 basis points. Discuss (without calculations) what would happen to your estimate of the price change if this was a callable bond.
Briefly discuss the advantages and disadvantages of using the dividend growth model to estimate the cost of equity.
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