1. A 5-year bond with face value $1,000 (paid at maturity) and coupon rate 5% (coupon paid in arrears annually) has yield-to-maturity 4.5%. What is the convexity of the bond? 2. Assume that stock...

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1. A 5-year bond with face value $1,000 (paid at maturity) and coupon rate 5%


(coupon paid inarrearsannually) has yield-to-maturity 4.5%. What is the


convexity of the bond?


2. Assume that stock returns follow a 2-factor structure. The risk-free return is


3%. Portfolio A has average return 8% and factor-betas 0.7 and 0.9 (for


factor 1 and 2, respectively). Portfolio B has average return 10% and factor betas 1.2 and 1.1 (for factor 1 and 2, respectively). What is the average


return for portfolio C that has factor-betas 1 and 1 (for factor 1 and 2,


respectively)?

Answered Same DayJul 16, 2021

Answer To: 1. A 5-year bond with face value $1,000 (paid at maturity) and coupon rate 5% (coupon paid in...

Neenisha answered on Jul 16 2021
153 Votes
Question 1
        Risk Free Return    3%
            Portfolio A    Portfolio B
        Average Return    8%    10%
        Beta (Fact
or 1)    0.7    1.2
        Beta (Factor 2)    0.9    1.1
        We get the model as follows
        Average Return = Risk Free Rate + Beta 1 (Factor 1) + Beta 2 (Factor 2)
        8%    =    3%    +    0.7    90%    *    Factor 1
        10%        3%        1.2    1%        Factor 2
        8%    -    3%    =    0.7    90%    *    Factor...
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