Difference between a convertible and callable bond

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(a.) Calculate the duration of a 2 year 3.5% coupon paying bond with a face value of £ 1,000. Coupons are being paid semi-annually and the yield to maturity is 3%. Using the concept of duration approximation what would be the approximate price change if yield to maturity increase by 0.5%? What would be the approximation error?

(b.) A UK Certificate of Deposit (CD) was issues 95 days ago and has another 25 days until maturity. Its initial investment was £500,000 with a yield of 3%. If the current yield on investments with 25 days to maturity is 2.75%, what would be the price of this CD today? Explain how you price a UK Treasury Bill which has 25 days to maturity left?

(c.) Carefully explain why a 10 year corporate bond issued by Boeing is more difficult to price than a 10 year US Treasury Bond.

(d.) Explain the difference between a convertible and callable bond. How would their yields to maturity compare to the yield to maturity of a fixed coupon paying bond with the same time to maturity?

(e) A 10 year UK government bond is not risk free. Discuss this statement and explain what determines interest rate sensitivity.

Reference no: EM133000463

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