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ID: 2791458 • Letter: 2
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2% t , (! " : "2-,F-@ 100%1. 0 Search in Sheet Home Layout Tables Data abc whap Text , General Merge C0 00Conditional Calculation Insert Delete Format Themes Aa F16 2 The convexity of a bond is affected as follows o.5 Positively with maturity Positively with yield Irversely with coupon Choices a and b Choices a and c b) 10 If you expected interest rates to rise, you would prefer to own bonds with 0.5 point) a.)short maturities and low coupons b)long maturities and high coupons c).long maturities and law coupons d). short maturities and high coupons e) none of the above 12 13 14 15 16 17 18 19 20 The importance of the reinvestment assumption increases witha WHY? Low, short Low, long High, short High, lone Zero, very lone 21 0.5 point) 23 24 25 26 27 28 29 30 31 32 e) 35 36 37 38 39 41 42 43 45 47 Prob 2 Prob 4Prob Prob 6 | Normal View Cakulate Sum-0Explanation / Answer
Convexity has following relations with the three:
-Maturity: longer the maturity, higher is the convexity/price sensitivity to yield changes.
-Coupon: higher the coupon the lower is the convexity/price sensitivity to yield changes. Zero coupon bond has highest convexity
-Yield: the lower the yield the higher the convexity/price sensitivity to yield changes. In the price yeild curve, the lower the yield goes the higher the convexity/price sensitivity as compared with the higher yield portion of the curve
If you expected interest rates to rise you would prefer to own bonds with short maturities and high coupons. Let’s say a company issued a bond paying 6% and maturing in 2034. It cost you $1,000 to buy, so the bond pays you $60 a year. If interest rates go up to 11%, though, no one would want to buy your bond for $1,000. It’s only returning 6%, while other new bonds are returning 11%.
The importance of reinvestment assumption increases with a high coupon and long term to maturity. Higher the maturity and more is the time to reinvest interim earnings, and with higher coupon too.
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