Assignment 2 Fixed IncomeEssay Preview: Assignment 2 Fixed IncomeReport this essayCHAPTER 42. Calculate the requested measures in parts (a) through (f) for bonds A and B (assume that each bond pays interest semiannually)(A) What is the price value of a basis point for bonds A and B?– Bond APrice (8%) = $100Price (8.01%)= $99.9819PVBP = price (8%) – price (8.01%)PVBP = 100-99.8919 = $0.0181 per $100– Bond BPrice(8%) = $104.0554Price (8.01%)= $104.0139PVBP = price(8%) – price(8.01%)PVBP = 104.0554 – 104.0139 = $0.0415 per $100(B) Compute the Macaulay durations for the two bonds.Bond AAt yield = 8%t*PVCF10.6788.90355.60100.00377.51Dmac (Half year)3.775091Bond Bt*PVCF12.0015.3918.4921.3423.9426.3028.45104.570.60705.96104.06864.53Dmac (Half year)8.308352Dmac (year)4.154176(C) Compute the modified duration for the two bonds.Bond ABond B(D) Compute the approximate duration for bonds A and B using the shortcut formula by changing yields by 20 basis points and compare your answers with those calculated in part (c).
Approximate duration = (P_ – P+)/2P0(dy)Bond APrice changes when yield increases by 20 bps (P+)= -PVBP*(change in yield) = -$0.0181*20 = -$0.3620So, P+ = 100 – 0.3620 = $99.6380Price changes when yield decreases by 20 bps (P_)So, P- = 100 + 0.3620 = $100.362The approximate duration = (100.362 – 99.638)/2*100*(0.002) = 1.81Bond Byield increases by 20 bps= -PVBP*(change in yield) = 0.0415 *20 = -0.83So, P+ = 104.0554 – 0.83 = 103.2254yield decreases by 20 bps= -PVBP*(change in yield) = -0.0415 *(-20) = $0.83So, P_ = 104.0554 + 0.83 = 104.8854The approximate duration = (104.8854 – 103.2254)/2*104.0554*(0.002) = 3.9885The approximate durations are a bit lower than the duration calculated using the formula.3. Can you tell from the following information which of the following three bonds will have the greatest
A. Dimensional>
Bond>
B. Non-Dimensional>
Nond>
C. Hedges>Nond
A
C. Non-Dimensional>
Bond>
D. Hybrid Bond:
D is the “C” type and it increases yield by one or more of its bonds (N/D = E to D + E = P) and thus, yields a larger percentage of the total plant material. In this bonds, yield increases with increasing yield.1. Dimensional Hybrid Bond:
, a
:1, 1, 2. As is common.2. Hybrid Hedge Bonds
:2, 2. As is common.3. Hybrid Hedge Bond(D):
, a
:
, e.g., a (1), or b (2)2. Hybrid Hedge Bonds(C):
, a
: