Managing+Fixed-Income+Portfolios

Managing+Fixed-Income+Portfolios - (c Show that if the...

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1 FINA 3104 Practice Problems Fall 2011 Managing Fixed-Income Portfolios 1. True or False (a) Holding other factors constant, the Macaulay’s Duration of a bond is always increasing with the bond’s maturity. (b) Using Duration and Convexity to approximate bond price sensitivity to interest rate is more accurate than using Duration alone. (c) The Macaulay’s Duration of a bond cannot be longer than the bond’s maturity. (d) If the Macaulay’s Duration is matched to the holding period, then reinvestment risk and price risk would still offset each other under any yield curve changes. 2. Managing Interest Rate Risk Suppose you purchase a five-year, 15% coupon bond (paid annually) with a yield-to-maturity of 9% per year. The face value of the bond is $1000. (a) Show that the duration of this bond is approximately equal to four years. (b) Calculate the future value of all payments four years from today if the yield rises from 9% to 10%, assuming all coupons are reinvested at 10%.
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Unformatted text preview: (c) Show that if the yield falls to 8% the future value of all payments four years from today is approximately equal to the future value in (b). Assume all coupons are reinvested at 8%. 3. Duration and Bond Price Sensitivity (a) Compute the duration of a semi-annual coupon bond with a 2-year maturity. The bond trades at par and has an 8% annualized coupon. (b) Use the duration in (a) to calculate the change in bond price if the semi-annual yield is 4.25%. (c) Use the duration in (a) to calculate the change in bond price if the effective annual bond yield is 8.5%. 2 4. Recommended Problems from the Textbook (BKM) Match Duration to Holding Period: Chapter 16 Problem 12 (P.567) Duration and Convexity: Chapter 16 Problem 16 (P.568) (Note: In the final exam, you are not required to use a financial calculator. Every calculation problem in the exam can be solved by using the basic math functions of a calculator.) Convexity: Chapter 16 Problem 21 (P.569)...
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