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ADMS4504-Assignment1-F10 - ADMS4504 3.0 AP/ADMS 4504 3.0...

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ADMS4504 3.0 Assignment #1 Page 1 AP/ADMS 4504 3.0 Fixed Income Securities and Risk Management Fall 2010 Assignment #1 Instructions: (1) This assignment is to be done individually . You must sign and submit the standard cover page supplied as the last page of this assignment. (2) This assignment is due on October 26 , 2010. (3) The work can be typed or handwritten. If it is handwritten and too difficult to read due to messiness and poor handwriting, it will receive zero credit. (4) You must show all details of your work to receive full credit. (5) This assignment contains 5 questions and carries a total of 40 points . Question 1 (8 marks) A company issues a 5-year step-up note rating AA+/Aa2 paying semi-annual coupons. The coupon rate starts at 3.45% and goes up by 25 bps every year. The issue sells at par (i.e. $100). (a) What is the BEY of this note? (2 marks) (b) Use a 20 bps rate shock to approximate the duration of the note. What is the approximate dollar price change if the yield declines by 100 bps?
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