| Prepared by William Lim, University of New Brunswick. Go to http://www.smartmoney.com/onebond/index.cfm?story=bondcalc and examine the relationship between yield% (yield to maturity) and price for a 30 year bond by sliding along the line for “Price” and observing the changes in the yield%. What is the relationship between price and yield to maturity? Next, we will use a more sophisticated bond calculator on the web. Ensure that you enable the cookies and javascript on your browser before entering the site. Go to http://bonds.about.com/money/bonds/cs/calculators/index.htm. From the available calculators, select FiCalc. Once selected, choose CALCULATOR. The site will lead you through a series of questions. Indicate that you plan to evaluate Corporate Securities and Bond – Fixed Income. Once you have entered the above information you can enter data for a particular bond and calculate the available statistics. Prior to entering the data below, set the calculations to mark all available calculations. For this problem, we will use a 10-year bond that is selling at its par value as the base case. The data is entered as follows: Price: $100
Coupon: 10
Maturity as d/m/yr: (enter a full 10 years from the date)
Settings: Annual Coupons Once the data is entered, then calculate the statistics. The calculator has a printer formatting option if you want a hard copy of the results. Repeat this process for a price of $87 and $113. What are the duration, convexity, and interest on interest calculations for the bond at the base price of $100? Do you earn more or less interest on interest when the price of the bond is $113? Compare this to the base case. Why does that happen? Is the bond more or less price sensitive at a price of $87? Compare this to the base case. Does the bond have a higher or lower level of convexity at that price? | 
2003 McGraw-Hill Higher Education