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Consider Bond ABC. It’s a bit of an odd bond that has a step-up clause in...

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Finance

Consider Bond ABC. It’s a bit of an odd bond that has a step-upclause in it. Specifically, the bond has a CR of 5% for the nextfive years, but then it increases to 6% for the remaining 10 yearsof the bond. The YTM on the bond is 5.4%, and payments are madesemi-annually. The face value of the bond is $1,000 and paymentsare made semiannually.  

a.   What is the Modified Duration of thisbond?       

b.   What is the Convexity of theBond?        

c.   What is the predicted price of the bond accordingto both Duration and Convexity, if the YTM increases by 1%?

Answer & Explanation Solved by verified expert
3.6 Ratings (603 Votes)
We need to formulate the table as shown below Payment frequency is semi annual Hence number of periods nos of half years in 15 years 2 x 15 30 Cash flow per period over first 5 years ie 10 periods Semi annual coupon 52 25 x 1000 25 Cash flow per period over next 10 years ie 20 periods Semi annual coupon 62 3 x 1000 30 Cash flow in the last period semi annual coupon Face value repayment 30 1000 1030 Yield 54 per annum Yield per period Semi annual yield y 54 2 27 Discount factor DF 1 yn Please see    See Answer
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Transcribed Image Text

Consider Bond ABC. It’s a bit of an odd bond that has a step-upclause in it. Specifically, the bond has a CR of 5% for the nextfive years, but then it increases to 6% for the remaining 10 yearsof the bond. The YTM on the bond is 5.4%, and payments are madesemi-annually. The face value of the bond is $1,000 and paymentsare made semiannually.  a.   What is the Modified Duration of thisbond?       b.   What is the Convexity of theBond?        c.   What is the predicted price of the bond accordingto both Duration and Convexity, if the YTM increases by 1%?

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