LOS d, (Part 2): Compute the approximate percentage price change for a bond, given the bond's effective duration and a specified change in yield.
Q1. A non-callable bond has an effective duration of 7.26. Which of the following is the closest to the approximate price change of the bond with a 25 basis point increase in rates using duration?
A) -0.018%.
B) 1.820%.
C) -1.820%.
Q2. James Walters, CFA, is an active fixed income portfolio manager. He manages a portfolio of fixed income securities worth $7,500,000 for an institutional client. Walters expects a widening yield spread between intermediate and long term securities. He would like to capitalize on his expectations and considers several transactions in a number of different securities. On 01/31/06, Walters expects the yield of the 2-Year Treasury Note to decrease by 10 basis points and the yield of the 30-Year Treasury Bond to increase by 11 basis points. The characteristics of these two fixed income securities are shown in Table 1. Prices are quoted as a percentage of par value and the Price Value of a Basis Point is per $1 million par amount.
|
Table 1 | ||
|
Security Characteristics | ||
|
|
2-Year T-Note |
30-Year T-Bond |
|
Maturity |
01/31/08 |
11/15/35 |
|
Bid-Ask Spread (basis points) |
5.0 |
5.0 |
|
Coupon |
5.375% |
6.125% |
|
Bid Price |
99.7236 |
104.6086 |
|
Ask Price |
99.7736 |
104.6586 |
|
Yield to Maturity |
5.51% |
5.80% |
|
Price Value of a Basis Point |
186.6484 |
1461.1733 |
He also has the three year term structure of interest rates. This is shown in Table 2.
|
Table 2 | |
|
Term Structure of Interest Rates | |
|
Year |
Spot Rate |
|
0.50 |
5.5227% |
|
1.00 |
5.5537% |
|
1.50 |
5.5444% |
|
2.00 |
5.5205% |
|
2.50 |
5.5114% |
|
3.00 |
5.5156% |
Walters thinks of several different trading strategies that would allow him to take advantage of his expectations. He would like to evaluate each strategy to determine which offers the best risk-return tradeoff.
James wants to translate the estimated price change into a change in value of a position in a particular security. What is the best estimate of the change in value of a $100,000 principal position in Treasury Notes if yields change by -10 basis points?
A) $186.65.
B) $1,866.48.
C) $18.66.
Q3. The price of a bond is equal to $101.76 if the term structure of interest rates is flat at 5%. The following bond prices are given for up and down shifts of the term structure of interest rates. Using the following information what is the approximate percentage price change of the bond using effective duration and assuming interest rates decrease by 0.5%?
Bond price: $98.46 if term structure of interest rates is flat at 6%
Bond price: $105.56 if term structure of interest rates is flat at 4%
A) 1.74%.
B) 0.174%.
C) 0.0087%.
thanks
thanks
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thnx
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