EC3333 Topic 8.pdf

# EC3333 Topic 8.pdf - Topic 8 1 A newly issued bond has a...

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1 Topic 8 1. A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon payments coming once annually). The bond sells at par value. a. What are the convexity and the duration of the bond? b. Find the actual price of the bond assuming that its yield to maturity immediately increases from 7% to 8% (with maturity still 10 years). c. What price would be predicted by the duration rule? What is the percentage error of that rule? d. What price would be predicted by the duration-with-convexity rule? What is the percentage error of that rule? 2. Suppose that you want to arrange today to invest \$100 one year from now for one year. Suppose y 1 is the yield to maturity of a one-year zero-coupon bond, and y 2 is the yield to maturity of a two-year zero-coupon bond. Discuss how you can do that. What is the return on your future investment that you can lock in today ? 3. Procter & Gamble will pay an annual dividend of \$0.65 one year from now.

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• Spring '11
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