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Lecture 5 - Tutorial

This document discusses bond duration and convexity concepts through example questions. It asks the reader to: 1) Estimate the duration of various securities including deposits, bonds, and floating rate notes using a "see-saw" visualization. 2) Calculate the modified duration and bond price volatility (BPV) of a 10-year Treasury bond given its price, yield, and Macaulay duration. 3) Rank bonds according to risk and BPV from lowest to highest. 4) Reprice a bond given a change in yield and calculate its dollar price change ratio to examine the impact of convexity.

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Carmen Alexandra Iamandii
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26 views2 pages

Lecture 5 - Tutorial

This document discusses bond duration and convexity concepts through example questions. It asks the reader to: 1) Estimate the duration of various securities including deposits, bonds, and floating rate notes using a "see-saw" visualization. 2) Calculate the modified duration and bond price volatility (BPV) of a 10-year Treasury bond given its price, yield, and Macaulay duration. 3) Rank bonds according to risk and BPV from lowest to highest. 4) Reprice a bond given a change in yield and calculate its dollar price change ratio to examine the impact of convexity.

Uploaded by

Carmen Alexandra Iamandii
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Lecture Five Duration and Convexity

Question 1
Try to estimate the Macaulay duration of each of the securities below just by visualising it on the Macaulay 'see-saw'.
a) Non-interest bearing deposit b) Six month Eurodeposit (in months) c) Ten-year floating rate note where the coupon rate is reset semi-annually, in line

with the 6 month LIBOR (in months)


d) Ten year zero coupon bond (in years) e) Ten year 10% annual coupon bond (rounded to the nearest number of years) is it 5. 7, or 10 years?

Question 2 Settlement date: Security: Type: Price: Accrued: Yield: Duration: 16 April 2010 12% US T-Bond maturing on 4 January 2016 Semi-annual, Actl/Actl 124-11+ 3.4517% 7.00% 4.32 years

a) Using the bonds duration calculate its modified duration, to 4 decimal places b) Using the value in a) calculate the bonds BPV, to 5 decimal places c) Using the result calculated in (b), estimate the expected change in the bond's price if its yield were to rise by 10 basis points, from 7.00% to 7.10% to 2 decimal places Question 3
Consider the following securities and rank them according to risk, BPV, from 1 = lowest risk to 4 = highest risk:

12 month T-bill 14 year 8% US Treasury bond yielding 12% 6 month CD 16 year 15% US Treasury bond yielding 12%

Question 4
You currently hold the following bond:

Security: Type: Price: Macaulay duration:

10% bond maturing in 10 years Annual, E30/360 103.00 6.809 years

Position held: USD 10 million Firstly, a) b) c) d) Calculate yield at its current price Add 1% to the calculated yield and reprice Take the difference between the two prices Divide this difference by the bonds original dirty price

Next calculate the modified duration of the bond using the analytical formula:
Modified duration = Macaulay duration (in years) (1 + Yield/Nr Coupons per year)

Why do these two values differ: a) Because of rounding errors b) Because the bond has convexity c) Because the bond has credit risk as well as market risk d) Because of specific supply and demand factors

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