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A 12.75-year maturity zero-coupon bond selling at a yield to maturity of 8% (effective annual yield) has convexity of 150.3 and modified duration of 11.81 years. A 30-year maturity 6% coupon bond making annual coupon payments also selling at a yield to maturity of 8% has nearly identical duration-11.79 years-but considerably higher convexity of 231.2.
Compare the performance of the two bonds in the two scenarios, one involving an increase in rates, the other a decrease. Based on the comparative investment performance, explain the attraction of convexity.
Do you think it would be possible for two bonds with equal duration but different convexity to be priced initially at the same yield to maturity if the yields on both bonds always increased or decreased by equal amounts, as in this example? Would anyone be willing to buy the bond with lower convexity under these circumstances?
For three years, there was no technological change in Longland but capital per hour of labor increased from $10 to $20 to $30 and real GDP per hour of labor increased from $3.80 to $5.70 to $7.13. Then, in the fourth year, capital per hour of labo..
the company's value in the hands of current management is somewhere between $10 million and $110 million, uniformly distributed over this range. The current management will sell the company to you if, and only if, your bid exceeds the true value k..
Recent increases in rents have caused the citizens of Elmville to vote for a rent ceiling of $1200. Assuming all rental units in Elmville are identical and the supply and demand for rental units are given by Qs = -1000 + 20P Qd = 50000 - 10P
a) If pizzas sell for $14, what is Pat's profit-maximizing output per hour What is her profit (or loss b) What is Pat's shutdown point (Hint: how low can Pat's price get before is shuts down) c) Graph Pat's MR, MC, ATC on the same diagram.
An analysis of stock market manufactures the following data about the returns of two stocks.
Do these utility functions exhibit diminishing marginal utility of X Explain. For each utility function, calculate the marginal rate of substitution of good X for good Y (i.e. -marginal value of X, measured in units of good Y) associated with the bun..
Suppose that the total benefit and total cost from an activity are, respectively, given by the following equations: B(Q)=150+28Q-5Q^2 and C(Q)=100 + 8Q(Note: MB(Q)=28-10Q and MC(Q)=8. What level of Q maximizes net benefits
If he invests $100 monthly, how much will be in the retirement fund in 25 years if it averages a return of 5.5% APR with monthly compounding. Another retirement fund offer 6% EAR with monthly compounding. What would the value of this be ..
the state of glottamora has $100 million remaining in its budget for the current year. one alternative is to give glottamora a one- time tax rebate. alternatively, two proposals have been made for state expenditures of these funds.
A) Only eight acres of land are uncontaminated (with trees) b) We have a six months' supply of food, including 100 pounds of dried corn, 3 pounds of dried onions, 2 pounds of dried pumpkin seed. C) A fresh flowing spring of water exists. D) A two a..
What is the dollar rate of return on a 10,000 pound deposit held in a British bank for a year when the British interest rate (annual) is 10 percent, and the exchange rate is $1.50 per pound at the beginning of the year
Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs $5 and the government wants to put a tax on it to reduce smoking by 20%, what should be the size of the tax per pact of cigare..
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