Essentials of Investments, 8th Edition

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MAIN MENU -- Chapter 11
Instructions

Problem 18

Problem 22

Problem 19

Problem 23

Problem 21

Problem 24

Copyright 2010 McGraw-Hill/Irwin

Copyright 2004 McGraw-Hill/Irwin

Essentials of Investments, 8th Edition

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Instructions
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Entering your information
Entering data
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Navigating the Workbook

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you will see a separate tab for each problem along with the Main Menu,
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Another way to move quickly around an Excel workbook is by using the
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Copyright 2008 McGraw-Hill/Irwin

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Copyright 2008 McGraw-Hill/Irwin

Chapter 11
Problem 18
Student Name:
Course Name:
Student ID:
Course Number:
Use the Excel model below to answer each question.
Inputs
Settlement date
Maturity date
Coupon rate
Yield to maturity
Coupons per year
Outputs
Macaulay Duration
Modified Duration

Copyright 2008 McGraw-Hill/Irwin

FUNCTION
FUNCTION

Use Excel's Duration Function

Use Excel's Modified Duration Function

Chapter 11
Problem 19
Student Name:
Course Name:
Student ID:
Course Number:
Use the Excel model below to answer each question.
Inputs
Settlement date
Maturity date
Coupon rate
Yield to maturity
Coupons per year
Outputs
Macaulay Duration
Modified Duration

FUNCTION
FUNCTION

Explain why the duration changes in the direction it does.

Answer:

Copyright 2008 McGraw-Hill/Irwin

Use Excel's Duration Function

Use Excel's Modified Duration Function

Chapter 11
Problem 21
Student Name:
Course Name:
Student ID:
Course Number:
Use the Excel Applications model below to answer this question.
Convexity

Coupon
YTM
Maturity
Price

#DIV/0!

Time (t)

Cash flow

PV(CF)

1
2
3
4
5
6
7
8
9
10

0
0
0
0
0
0
100
0
0
0

0.000
0.000
0.000
0.000
0.000
0.000
100.000
0.000
0.000
0.000

Sum:

100
Convexity:

Copyright 2008 McGraw-Hill/Irwin

t + t^2 (t + t^2) x PV(CF)

2
6
12
20
30
42
56
72
90
110

0.000
0.000
0.000
0.000
0.000
0.000
5600.000
0.000
0.000
0.000
5600.000
56.000000

Essentials of Investments, 8th Edition

Chapter 11
Problem 22

Calculate the durations of the two bonds if the interest rate increases to 12%.
(a) Why does the duration of the coupon bond fall while that of the zero remains unchanged?
(b) Calculate the duration of the coupon bond if the coupon were 12% instead of 8%. Explain why the duration is lo

Chapter 11
Problem 22
Student Name:
Course Name:
Student ID:
Course Number:
Use the Excel Applications model below to answer this question.
Interest rate:
Time until
Payment
(Years)
A. 8% coupon bond
1
2
3
Sum:
B. Zero-coupon bon

1
2
3

Payment
80
80
1080

0
0
1000

Sum:

Payment
Discounted
at 12%
80.000
80.000
1080.000
1240.000
0.000
0.000
1000.000
1000.000

Weight
0.0645
0.0645
0.8710
1.0000
0.0000
0.0000
1.0000
1.0000

(a) Why does the duration of the coupon bond fall while that of the zero remains unchanged?
Answer:

(b) Calculate the duration of the coupon bond if the coupon were 12% instead of 8%. Explain why the duration is lo
Interest rate:
Time until

Payment
Payment

Weight

A. 12% coupon bon

Sum:

Answer:

Payment
(Years)
1
2
3

Payment
120
120
1120

Discounted
at 10%
120.000
120.000
1120.000
1360.000

Weight
0.0882
0.0882
0.8235
1.0000

dition

Main Menu

Explain why the duration is lower.

Time
x
Weight
0.0645
0.1290
2.6129
2.8065
0.0000
0.0000
3.0000
3.0000

Explain why the duration is lower.

Time

x
Weight
0.0882
0.1765
2.4706
2.7353

Essentials of Investments, 8th Edition

Chapter 11
Problem 23
(a) Calculate the convexity of the 8% coupon bond at the initial yield to maturity of 10%.
(b) What is the convexity of the zero-coupon bond?

Chapter 11
Problem 23
Student Name:
Course Name:
Student ID:
Course Number:
Use the Excel Applications model below to answer this question.
Interest rate:
Time until
Payment
(Years)
A. 8% coupon bond
1
2
3
Sum:
B. Zero-coupon bon

1
2
3

Payment
80
80
1080

0
0
1000

Sum:

Payment
Discounted
at 10%
80.000
80.000
1080.000
1240.000
0.000
0.000
1000.000
1000.000

t2+t
2
6
12

2
6
12
0

(a) Calculate the convexity of the 8% coupon bond at the initial yield to maturity of 10%.
Convexity

FORMULA

(b) What is the convexity of the zero-coupon bond?

Convexity

FORMULA

dition

Main Menu

0%.

t2+t
x
PV
160.0000
480.0000
12960.0000
13600.0000
0.0000
0.0000
12000.0000
12000.0000

maturity of 10%.

Essentials of Investments, 8th Edition

Chapter 11
Problem 24

A 30-year maturity bond making annual coupon payments with a coupon rate of 12% has duration of 11.54 years a
The bond currently sells at a yield to maturity of 8%. Use a financial calculator or spreadsheet to find the price of th
maturity falls to 7% or rises to 9%. What prices for the bond at these new yields would be predicted by the duration
with-convexity rule? What is the percent error for each rule? What do you conclude about the accuracy of the two r

Chapter 11
Problem 24
Student Name:
Course Name:
Student ID:
Course Number:

Coupon rate
Duration
Convexity
Yield to maturity

years

Using a financial calculator, the price of the bond:

For yield to maturity of 7%:
For yield to maturity of 8%:
For yield to maturity of 9%:
Using the Duration Rule, assuming yield to maturity falls to 7%:
Predicted price change
Predicted price
Percentage error

FORMULA
FORMULA
FORMULA

Using the Duration Rule, assuming yield to maturity increases to 9%:

Predicted price change
Predicted price
Percentage error

FORMULA
FORMULA
FORMULA

Using Duration-with-Convexity Rule, assuming yield to maturity falls to 7%:

Predicted price change
Predicted price

FORMULA
FORMULA

Percentage error

FORMULA

Using Duration-with-Convexity Rule, assuming yield to maturity rises to 9%:

Predicted price change
Predicted price
Percentage error

Answer:

FORMULA
FORMULA
FORMULA

dition

% has duration of 11.54 years and convexity of 192.4.

readsheet to find the price of the bond if its yield to
uld be predicted by the duration rule and the durationabout the accuracy of the two rules?

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