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Microsoft has a bond outstanding (symbol: MSFT.GB) with a 4.20% coupon rate and a yield to maturity (continuously compounded) of 1.535%. The bond expires in June, 2019, and pays interest semi-annually. Use a face value of $100 for the following. Note: You might find it helpful to use a table like we did in class, but you don’t need to.
a. Estimate the current price of the bond.
b. Calculate the duration of the bond.
c. Calculate the convexity of the bond.
d. Suppose the yield goes up by 1%. Use your estimates of duration and convexity to estimate the change in price of the bond.
e. Under what circumstance is it sufficient to use only duration instead of both duration and convexity?
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Your cousin wants to buy a car but he really can’t afford it. He needs a loan of $22,000. The finance manager at the dealership offers him something like a loan in which your cousin will get the $22,000 and will pay $413 per month for the next 60 mon..
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