Term 1, Workshop 1

 

Questions to be done during the workshop itself.

 

In your groups, answer the following:  Please note that throughout these workshops, I will be selecting groups to come up and talk us through their calculations and answer. You will have the overhead projector to explain your results to the rest of us. You can choose which member or members will talk us through your workings.

 

Question 1a:

Using an spreadsheet style format, de termine the convexity for a 5 year maturity bond making annual coupon payments with a coupon rate of 12%. The bond currently sells at a yield to maturity of 8%.

 

Question 1b:

If the duration for the bond is 4. 11, and the bond price is $1159.71, determine the predicted bond price change and hence bond price if the yield to maturity falls to 7%. Use the duration rule. 

 

Question 1c:

Using the duration-with-convexity rule, what is the predicted price change and hence predicted bond price if the  yield to maturity falls to 7%?

 

Question 1d:

Using a financial calculator, determine the bond price if the yield to maturity falls to 7%. 

 

Question 1e:

As an investment manager, you want to immunize your obligation using two year zero coupon bonds and perp etuities paying annual coupons. How would you immunize your obligation?  

 

Question 1.f:

In your own words, in light of the questions you have just answered, explain what is meant by convexity and how it influences the predicted bond price change.