Exam 3: Interest Rates and Security Valuation

What is convexity? How does convexity affect duration-based predicted price changes for interest rates changes? Convexity is a measure of the nonlinearity (curvature) of a change in a bond's price caused by a change in interest rates. The level of convexity increases for greater interest rate changes. Duration is a linear estimate of a bond's price change as the interest rate changes from its current level. Due to convexity, the greater the interest rate change, the greater the error in using duration to estimate the bond's price change. For a multimillion-dollar bond portfolio, the dollar errors can be quite significant. In abnormal markets, bond investors may face more or less risk than the bond's duration would imply. Calculus

Which of the following bond terms are generally positively related to bond price volatility? I. Coupon rate II. Maturity III. ytm IV. Payment frequency

A 6-year annual payment corporate bond has a required return of 9.5% and an 8% coupon. Its market value is $20 over its PV. What is the bond's Err?

A bond that pays interest annually has a 6% promised yield and a price of $1025. Annual interest rates are now projected to fall 50 basis points. The bond's duration is 6 years. What is the predicted new bond price after the interest rate change? (Watch your rounding.)

A 12-year annual payment corporate bond has a market price of $925. It pays annual interest of $60 and its required rate of return is 7%. By how much is the bond mispriced?

A bond with an 11% coupon and a 9% required return will sell at a premium to par.

A ten-year maturity zero coupon bond will have lower price volatility than a ten-year bond with a 10% coupon.

A six-year maturity bond has a five-year duration. Over the next year maturity will decline by 1 year and duration will decline by

The duration of a 180-day T-Bill is (in years)

A corporate bond has a coupon rate of 10% and a required return of 10%. This bond's price is

An annual payment bond with a $1,000 par has a 5% quoted coupon rate, a 6% promised ytm, and 6 years to maturity. What is the bond's duration?

Which would have a longer duration: a) a 5-year fully amortized installment loan with semiannual payments or b) a 5-year semiannual payment bond, ceteris paribus. Why?

A zero coupon bond has a duration equal to its maturity and a convexity equal to zero.

The greater a security's coupon, the lower the security's price sensitivity to an interest rate change, ceteris paribus.

Explain the effects of coupon and maturity on volatility.

An annual payment bond has a 9% required return. Interest rates are projected to fall 25 basis points. The bond's duration is 12 years. What is the predicted price change?

A 10-year maturity coupon bond has a 6-year duration. An equivalent 20-year bond with the same coupon has a duration

The ___________ the coupon and the ______________ the maturity; the __________ the duration of a bond, ceteris paribus.

A 15-year corporate bond pays $40 interest every six months. What is the bond's price if the bond's promised ytm is 5.5%?

A 15-year, 7% coupon annual payment corporate bond has a PV of $1055.62. However, you pay $1024.32 for the bond. By how many basis points is your Err different from your rrr?