Presentation Week 1

Han Xu; Huang Jingyao; Wang Yuqing; Wen Siyu

1
Q1

Everything else equal, the __________ the maturity of a bond

and the __________ the coupon, the greater the sensitivity of the
bond's price to interest rate changes.

1. Longer ; Higher
2. Longer; Lower
3. Shorter; Higher
4. Shorter; Lower

2
Q1
  The longer the maturity
the later the cash flows paid by the bond
the greater the sensitivity of the bond’s price
 The lower the coupon
the later the cash flows paid by the bond
the greater the sensitivity of the bond’s price
 Longer Duration  Greater Sensitivity

Longer maturity  larger n  longer duration

Lower coupon  larger of later payment  longer duration

3
Q1
Face Amount=$1,000
3-year zero coupon 10-year zero coupon 3-year 10% coupon
Interest Rate
(%) P($) ΔP/P P($) ΔP/P P($) ΔP/P
0 1,000.00 1,000.00 1,300.00
1 970.59 -2.94% 905.29 -9.47% 1,264.69 -2.72%
2 942.32 -2.91% 820.35 -9.38% 1,230.71 -2.69%
3 915.14 -2.88% 744.09 -9.30% 1,198.00 -2.66%
4 889.00 -2.86% 675.56 -9.21% 1,166.51 -2.63%
5 863.84 -2.83% 613.91 -9.13% 1,136.16 -2.60%
6 839.62 -2.80% 558.39 -9.04% 1,106.92 -2.57%
7 816.30 -2.78% 508.35 -8.96% 1,078.73 -2.55%
8 793.83 -2.75% 463.19 -8.88% 1,051.54 -2.52%
9 772.18 -2.73% 422.41 -8.80% 1,025.31 -2.49%
10 751.31 -2.70% 385.54 -8.73% 1,000.00 -2.47%

4
Q2

A coupon bond that pays interest of $60 annually has a par value
of $1,000, matures in 5 years, and is selling today at an $84.52
discount from par value. The yield to maturity on this bond is
_________.

1. 6%
2. .23%
3. 8.12%
4. 9.45%

5
Q2

T0 T1 T2 T3 T4 T5
Pay $915.48
(=$1,000-$84.52)
Receive $60 $60 $60 $60 $1,060

 YTM=8.12%

6
Q3
A bond pays annual interest. Its coupon rate is 9%. Its value at
maturity is $1,000. It matures in 4 years. Its yield to maturity is
currently 6%.
The duration of this bond is ___ 3.56 ___ years.

7
Q3
  What is Duration?
Duration is a measure of the sensitivity of the price of a bond or other
debt instrument to a change in interest rates.
 Duration estimates how many years it will take for an investor to be
repaid the bond’s price by its total cash flows.
 Calculation Formula

 Duration is additive

8
Q3

Year PV % of Value
Cash Flow (PV/Price)*t
(t) (at 6%) (PV/Price)
1 $ 90 $ 84.91 7.69% 0.0769
2 $ 90 $ 80.10 7.26% 0.1451
3 $ 90 $ 75.57 6.85% 0.2054
4 $ 1,090 $ 863.38 78.21% 3.1283
Total $ 1,103.95 100.00% 3.5557

9
Q4
You have a 15-year maturity, 4% coupon, 6% yield bond with
duration of 10.5 years and a convexity of 128.75. The bond is
currently priced at $805.76. If the interest rate were to increase
200 basis points, your predicted new price for the bond (including
convexity) is _________.

1. $638.85
2. $642.54
3. $666.88
4. $705.03

10
Q4
 Step 1:Prediction model including convexity

 Step 2: Explicit Variables

 Step 3: Substitute variables into the formula

 Step 4: Calculate

11
Q5

Suppose a bond has a modified duration of 3. If the interest rate

increases by 5%, the bond price will ______.

1. increase by 15%
2. decrease by 15%
3. increase by less than 15%
4. decrease by less than 15%
5. not change

12
Q5
Suppose a bond has a modified duration of 3. If the interest rate
increases by 5%, the bond price will ______.

 Step 1: Clarify the information

 =3

 Step 2: Clarify the question

The change in bond price, to get

 Step 3:
=15% Is that correct?

 Step 4: Convexity ？
13
Q5

  When

The absolute number of Actual Price Change < the absolute number of
Duration Approximation
14
 Thank You
Han Xu; Huang Jingyao; Wang Yuqing; Wen Siyu

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