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Bond Valuation

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A bond for the Chelle Corporation has the following charateristics:
Maturity 12 Years
Coupon 10%
Yield to Maturity 9.50%
Macaulay duration 5.7 Years
Convexity 48
Noncallable

a) Calculate the approximate price change for this bond using only its duration assuming its yield to maturity increased by 150 basis points. Discuss the impact of the calculation, including the convexity effect.

b) Calculate the approximate price change for this bond (using only its duration) if its yield to maturity declined by 300 basis points. Discuss(without calculations) what would happen to your estimate of the price change if this was a callable bond.

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Solution Summary

This solution comprised of a detail solution to value a bond with the help of its duration.

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Answer:

As we know that,

Assume that the par value of bond=$100
Given ...

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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