Graphical depiction using duration to estimate price changes, Financial Management

The price volatility properties of bonds with the help of the graph of the price/yield relationship. Let us now, with the help of a graph, illustrate how duration estimates the percentage price changes.

Figure 1: Price/Yield Relationship for an Option-free Bond with a Tangent Line

1906_option free bond.png

The price/yield relationship curve for an option-free bond has a convex shape; this is reflected in Figure 9. In the chart we can see a tangent line touching the curve at point z where price is equal to p* and yield is equal to y*. In the new price, the yield changes is estimated using the tangent line. The distance between the horizontal axis and the tangent line represents the price approximated by using duration starting with the initial yield y*. 

Posted Date: 9/10/2012 5:13:07 AM | Location : United States







Related Discussions:- Graphical depiction using duration to estimate price changes, Assignment Help, Ask Question on Graphical depiction using duration to estimate price changes, Get Answer, Expert's Help, Graphical depiction using duration to estimate price changes Discussions

Write discussion on Graphical depiction using duration to estimate price changes
Your posts are moderated
Related Questions
b) Each $1 of outlay prior to 31 December 2003 would mean a loss in NPV on the alternative project of $0·20. There is so an opportunity cost of using funds in 2002. Purchasing

Develop and implement strategic plan using bounce fitness as case study

Illustration  An investor with a 1-year investment horizon purchases a 20-year 5% corporate bond. The prevailing price of the bond is Rs.82.3488 for a yield of 6.2%

A proforma cost sheet of a company provides the following data:   RO Cost (per unit)      Raw materials 52

Trial Balances: If the trial balance does not result in a "0", the various records will need to be reviewed to pinpoint the spot where the unbalance occurred and any necessary

Q. Define the finance function? Is it a risk-return trade off? What is the basic role of a modern financial manager? What is the basic importance of finance function in the mana

Gretz Tool Company is a large U.S based Multinational Corporation with subsidiaries in eight different countries. The parent of Gretz provided initial cash infusion to establish ea

Q. Explain a variety of factors determining Dividend Policy? Dividend: - Dividend demotes to that part of net profits of a company which is distributed between shareholders as

The mortgage-backed securities dealt with till now are agency mortgage backed securities. There are other MBS which can be for any kind of real estate property.

Fixed income security is a financial obligation of an entity, which promises to pay a pre-specified amount of money at per-specified date. Debt securities (