concept of bond price elasticity

concept of bond price elasticity

 

Question One
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?

Question Two
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.

Question Three
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?

Question Four
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?

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