FIN 4243
Homework #2
1.
The price value of a basis point will be the same regardless if the yield is increased or
decreased by 1 basis point. However, the price value of 100 basis points (i.e., the change in price
for a 100basispoint change in interest rates) will not be the same if the yield is increased or
decreased by 100 basis points. Why?
2.
Can you tell from the following information which of the following three bonds will have the
greatest price volatility, assuming that each is trading to offer the same yield to maturity?
Bond
Coupon Rate (%)
Maturity (years)
X
8
9
Y
10
11
Z
11
12
3.
Answer the below questions for bonds A and B.
Bond A
Bond B
Coupon
8%
9%
Yield to maturity
8%
8%
Maturity (years)
2
5
Par
$100.0
0
$100.00
Price
$100.0
0
$104.055
(a) Calculate the actual price of the bonds for a 100basispoint increase in interest rates.
(b) Using duration, estimate the price of the bonds for a 100basispoint increase in interest rates.
(c) Using both duration and convexity measures, estimate the price of the bonds for a 100basis
point increase in interest rates.
(d) Comment on the accuracy of your results in parts b and c, and state why one approximation is
closer to the actual price than the other.
(e) Without working through calculations, indicate whether the duration of the two bonds would
be higher or lower if the yield to maturity is 10% rather than 8%.
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 Fall '08
 DUDLEY
 Interest Rates, Debt, Interest, Yield Curve

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