Order Description
Question 1 (300)words
Question 2 (300)words
Question 3 (300)words
Question 4 (475)words
Ensure you clearly define the underlined words and provide examples/graphs where possible.
Question One
Explain the concept of bond price elasticity. Would bond price elasticity suggest a higher price sensitivity for zero-coupon bonds or high-coupon bonds that are
offering the same yield to maturity? Why? What does this suggest about the market value volatility of mutual funds containing zero-coupon Treasury bonds versus
high-coupon Treasury bonds?
Question Two
How would a financial institution with a large bond portfolio be affected by falling interest rates? Would it be affected more than a financial institution with a
greater concentration of bonds (and fewer short-term securities)? Explain.
Question Three
Describe how bond convexity affects the theoretical linear price-yield relationship of bonds. What are the implications of bond convexity for estimating changes in
bond prices?
Question Four
a A zero-coupon bond with a par-value of $1,000 matures in 10 years. At what price would this bond provide a yield to maturity that matches the current market
rate of 8 per cent?
b What happens to the price of this bond if interest rates fall to 6 per cent?
c Given the above changes in the price of the bond and the interest rate, calculate the bond price elasticity?
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