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Consider four different bonds all having the same yield-to-maturity. Bond A is a consol that pays $50 every period forever and is currently priced at $764.29. Bond B, C and D have the same par value of $1, 000. However, they differ in their maturity and coupon rate. While bond B and C have a maturity of 5 years, bond D has a maturity of 8 years. Also, bond B and D have a coupon rate of 5% whereas bond C has a coupon rate of 7.5%.
(a) Calculate the prices for bond B, C and D.
(b) Calculate the duration for all bonds.
(c) Calculate the duration adjusted for convexity for all bonds.
(d) Suppose the yield-to-maturity increases by 1%. Calculate the price changes on the individual bonds based on the two duration measure and based directly on the pricing formula. Compare your answers. (e) Suppose the yield-to-maturity decreases by 1%. Calculate the price changes on the individual bonds based on the two duration measure and based directly on the pricing formula. Compare your answers.
Jun 27 2021 View more View Less
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