Extra Problems 5a

# Extra Problems 5a - 24 in the text 4 Calculate the duration...

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ACTSC 231 Extra Problems 5a 1. Find the duration at i = 8% of a common stock which pays annual div- idends. Assume that the next dividend is payable in 6 months time and the each dividend is 3% larger than the previous one. 2. Mary owes \$1210 at the end of 2 years. She has \$1000 available to invest. based on immunization. Assume the following investment are available: (a) cash (earns i = 10%) and zero coupon bonds of any maturity (yield- ing i = 10%) (b) cash (earns i = 10%) and 3-year zero coupon bonds (yielding i = 10%) 3. Find the duration at i = 8% of a common stock which pays annual divi- dends. Assume that the next dividend is payable in 1 years time and the each dividend is 3% larger than the previous one. (very similar to question
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Unformatted text preview: 24 in the text) 4. Calculate the duration at i = 5% of a 10-year annuity-immediate (annual payments). 5. Calculate the duration and convexity of a loan repaid with equal install-ments over n-periods if i = 0 . (hint: P n t =1 t = 1 2 n ( n + 1) and P n t =1 t ( t + 1) = 1 3 n ( n + 1)( n + 2) ) 6. Consider a 2-year \$1000 bond with 7% coupons paid semiannually. (a) Calculate the volatility and convexity of the bond at an interest rate of 10% compounded semiannually. (b) Using part a) calculate the approximate relative change in the price of the bond if interest rates increased from10% to 11% compounded semiannually. (c) Compare your answer in b) to the actual relative price change. 1...
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## This note was uploaded on 02/07/2010 for the course ACTSC 231 taught by Professor Chisholm during the Spring '09 term at Waterloo.

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