2. You are thinking about buying a bond and you want to consider your interest r
ID: 2729900 • Letter: 2
Question
2. You are thinking about buying a bond and you want to consider your interest rate exposure. The bond in question is a semiannual note issued by Bank of America that has a $1,000 face value, four years left until maturity and pays a coupon rate of 4.375%. It is currently yielding 5.875%. Because of a slowing economy, you expect a 75 basis point downward shift in the yield curve this year. Calculate the following: a. Price, duration, modified duration and convexity (manually, though you can confirm your answers using the Excel functions or one of the online calculators). b. the approximate dollar and percentage change in price due to duration and convexity c. the actual dollar and percentage change in price
Explanation / Answer
Interest = 1000*4.375=43.75
Price = 43.75 * CDF for 1 to 8 period @ 5.875% + 1000 * DF for 8th period @ 5.875%
= 273.03+633.36 = 906.39
duration = W*T
W= P.V. of each Cash flow /Bond price
durtion = 1 41.32
2 39.03
3 36.86
4 830.66
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