concept of bond price elasticity
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.
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?
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.
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?
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?