Investment Analysis – Duration, Convexity and Risk Immunisation

Duration, Convexity and Risk Immunisation

(a) Estimate the duration of a 7-year £100 par bond with a 6% annual coupon yielding 4% p.a.
In addition, estimate the percentage change in the bond price and also the new bond price if the yield increases to 4.20% p.a. The convexity is 55.9.
(30 marks)
(b) Using the following data, estimate the new bond prices of each of the 3 bonds if their yields (interest rates) increase by 0.25%. You should take into account both duration and convexity.

Duration, Convexity and Risk Immunisation

Duration, Convexity and Risk Immunisation

(c) Discuss the techniques that could be used by a bond portfolio manager to immunise their portfolio against risk.
Does the fact that many European countries have lost their AAA bond rating make it more difficult for fund managers investing in government bonds to immunise themselves against risk?

 

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Investment Analysis – Duration, Convexity and Risk Immunisation