-Whot should have an understanding of duration, modified duration and convexity. - Who should be able...

-Whot should have an understanding of duration, modified duration and convexity.
- Who should be able to calculate duration and should understand how to construct an immunized portfolio.
- Who understand active bond portfolio management, from the concept of interest-rate predictions, and exploit mispriced bonds.

Expert Solution

Duration of Bond - DOB(Duration of bond) is a measureance of a bond price sensitivity which shows changing in interest rate are known as Duration of bond. If a bond duration is 10 years then its interest rate rises to 10% or its reflect as 100 basis point or vice versa.

Modified Duration - Modified duration of bond is the bond which shows changes in securitues with change in interest rate are known as Modified duration.

Convexity of bond - Convexity of bonds are define as a non-linear relationship of bond price which are changes with changes in interest rate are known as convexity of bond.

Duration of bond is the measure of risk because it have a direct relationship of price volatility and the company able to calculate duration of bond for securing its holder.

Immunization Portfolio - Immunization protfolio is the portfolio which is used to measure the risk and impact of risk on net worth. Immunization is used to minimising the impact of interest rate on net worth and these are contruct as its better way for making portfolio.

Understanding of active bond portfolio management is easy that active bond portfolio stand for the portfolio which gives a regular interest and makes more profit is known as active bond portfolio management.

jeff jeffy answered 2 years ago

Question 4. A 12.75-year maturity zero-coupon bond has convexity of 150.3 and modified duration of 11.81...

Question 4. A 12.75-year maturity zero-coupon bond has convexity of 150.3 and modified duration of 11.81 years. A 30-year maturity 6% coupon bond with annual coupon payments has nearly identical modified duration of 11.79 years, but considerably higher convexity of 231.2. Suppose the yield to maturity on both bonds increases by 1%. What percentage change in price of the bonds as predicated by the duration plus convexity model? (6) Repeat part (a), but this time assume that the yield to...

6. a) What is duration? What is modified duration? &nbsp

6. a) What is duration? What is modified duration? b) What is Macaulay’s duration? c) What is crucial to formulating both active and passive strategies? d) How is immunization of a fully funded plan accomplished? What is a more direct form of immunization? 7. a) Consider an economy where the dominant industry is automobile production for domestic consumption as well as export. Now suppose the auto market is hurt by an increase in the length of...

1. Use duration to explain the “negative convexity” exhibited by callable bonds. Why is negative convexity...

1. Use duration to explain the “negative convexity” exhibited by callable bonds. Why is negative convexity a “negative” attribute from the investor’s viewpoint? 2. What happens to the “average life” of a pool of mortgages when prepayment speed increases? Why does prepayment speed increase when interest rates decrease? Discuss the negative convexity exhibited by mortgage-backed “passthrough” certificates in the context of duration and pre-payment speed. 3. Suppose a financial institution currently has a positive duration gap. How would its net...

Which of the following is true about duration and modified duration? I. The Macaulay duration calculates...

Which of the following is true about duration and modified duration? I. The Macaulay duration calculates the weighted average time before a bondholder would receive the bond's cash flows. II. Modified duration measures price sensitivity of a bond to changes in YTM by adjusting duration with a factor based on current yield. III. The value of duration and modified duration are usually very close, but duration is almost always a larger number.A.Duration is important to banks when they try to...

Bond duration/ convexity, Carnival Complex Analytics Duration to Worst 2.551 Option Adjusted Duration 2.551 Option Adjusted...

Bond duration/ convexity, Carnival Complex Analytics Duration to Worst 2.551 Option Adjusted Duration 2.551 Option Adjusted Spread 1,016.195 Convexity to Worst 8.336 Option Adjusted Convexity 8.336 Price is 92.4, YTM 10.162%, maturity 10/1/2023, coupon 7.20% semiannual. Using duration (duration to worst) and convexity (convexity to worst), if the yield FALLS by 60 basis points, what is the dollar and percentage change of the bond? The Rm (return on the S & P 500) is -5% (negative), the Rf (T-bill or...

Duration Problems 1. Why is it important to be able to estimate the duration of a...

**Duration Problems** 1. Why is it important to be able to estimate the duration of a bond or a bond portfolio? 2. Explain why you agree or disagree with the following statement: "Determining the duration of a financial asset is a simple process." 3. Explain why the effective duration is a more appropriate measure of a complex financial instrument's price sensitivity to interest rate changes than is modified duration.

Compute the Macaulay duration and modified duration of a 6%, 25-year bond selling at a yield...

Compute the Macaulay duration and modified duration of a 6%, 25-year bond selling at a yield of 9%. Coupon frequency and compounding frequency are assumed to be semiannual.

Given the following data, calculate the Price, Duration and Convexity of the Bond: Face Value =...

Given the following data, calculate the Price, Duration and Convexity of the Bond: Face Value = 1,000 Coupon Rate= 8.000% Discount Rate= 11.500% Remaining Years to Maturity= 3 Redemption Price = 100 Redemption= 2 CALCULATIONS Time until Payment PV of Pmt % Duration PV Factor years Convexity Payments Weight (Years) of (CF) Calc 1 2 3 4 5 6 Total= Price= Duration= Convexity=

Use the following information to determine duration and convexity, and then use those metrics to predict...

Use the following information to determine duration and convexity, and then use those metrics to predict a percentage change in the price of the bond assuming a 130 basis-point increase in yield. Time-to-maturity = 7 years, Coupon rate = 4%, paid semi-annually, Current bond-equivalent yield-to-maturity = 6.0%.

A related problem with duration analysis revolves around the concept of convexity . Please provide more...

A related problem with duration analysis revolves around the concept of convexity . Please provide more information on convexity and suggest two ways a way of reducing the impact of this limitation.

Question