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Saranya Guruvayurappan

Neeraj Kumar
Yashasvi Diptivilasa
Vikas K. Singh

Ans: (1), (2), (3),


The two plain vanilla corporate bonds with similar coupon rates but with different maturity dates are (1)
21 Century Fox and (2) Pfizor

21 Century Fox
CUSIP
Price
YTM
Coupon Rate
Maturity date
Modified Duration
Duration
Risk
Convexity

BBB+
652482AS
9
131.798
4.502394
6.75
01/09/2038
Workout OAS
12.887 13.060
13.177
Na
17.185 17.417
2.344
2.406

AMD Inc

CUSIP
Price
YTM
Coupon Rate
Maturity date
Modified Duration
Duration
Risk
Convexity

99
7.044322
6.75
03/01/2019
Workout OAS
3.364 3.384
3.483
N/A
3.35
3.37
0.138 0.139

4. Explain how duration and convexity varies across different maturity periods.
When all other factors are constant, the longer the maturity, the greater is the price volatility and a
property of modified duration is that, ceteris paribus, a bond with a longer maturity will have a greater
modified duration. This shows that greater the modified duration, the greater the price volatility. And
Duration is a measure of a bond's sensitivity to interest rate changes. Duration changes every time a
bond makes a coupon payment. Over time, it shortens as the bond nears maturity.
If the coupon rate and the bond's initial price are constant, the bond with a longer term to maturity will
display higher price volatility and a bond with a shorter term to maturity will display lower price
volatility. And since 21 Century Fox has a longer term to maturity than Pfizor, therefore it has greater
duration than Pfizor.
For any given bond, a graph of the relationship between price and yield is convex. This means that the
graph forms a curve rather than a straight line. The more convex the relationship the more inaccurate
duration is as a measure of the interest rate sensitivity. The convexity of a bond is a measure of the
curvature of its price/yield relationship. The degree to which the graph is curved shows how much a
bonds yield changes in response to a change in price.
A bond with greater convexity is less affected by interest rates than a bond with less convexity. Also,
bonds with greater convexity will have a higher price than bonds with a lower convexity, regardless of
whether interest rates rise or fall. Using duration and convexity measures together gives a better
approximation of the actual price change for a large movement in the required yield. As a bond moves
closer to maturity its price sensitivity decreases. Pfizor having lower term to maturity, has a lower
convexity.

Saranya Guruvayurappan
Neeraj Kumar
Yashasvi Diptivilasa
Vikas K. Singh

5. Examine the two bonds over periods of market interest rate changes and elaborate on the price
volatility (as measured by % change in price) of these bonds [Hint: use historical data]
The below charts from Bloomberg shows the chart1 21 Century Fox long term bond with a maturity date
in 2038 and chart 2 AMD Inc bond, which is a 5 year nod with maturity date in 2019. We can infer from
the charts that the AMD Inc bond, which is much closer to maturity is not as sensitive to changes in
interest rate and it is having a range of +3 to -3 for its rate of change of prices as seen in yellow part of
the chart compared to the 21 Century Fox, which is far away from maturity has a much more price
volatility from +8 to -8 for its rate of change as shown in yellow part of chart1.
Chart 1- 21 Century Fox

Saranya Guruvayurappan
Neeraj Kumar
Yashasvi Diptivilasa
Vikas K. Singh

Chart 2- AMD Inc

Saranya Guruvayurappan
Neeraj Kumar
Yashasvi Diptivilasa
Vikas K. Singh

Ans: (6) and (7)


Google
Price
YTM
Coupon Rate
Maturity date
Modified Duration
Duration
Risk
Convexity

AA
109.086
2.041
3.625
5/19/2021
Workout OAS
5.462
5.518
6.031
0.347

5.529
6.105
0.354

Google
Price
YTM
Coupon Rate
Maturity date
Modified Duration
Duration
Risk
Convexity

AA
106.14
2.266239
3.3
9/1/2021
Workout OAS
5.776
5.842
6.147
0.383

5.855
6.231
0.392