CHAPTER 18 QUESTION 9

FINANCE  Investment Analysis and Portfolio Management CHAPTER 18 QUESTION 9
 The Chartered Finance Corporation has issued a bond with the following characteristics  ：     Maturity--25 years  
 Coupon--9% 
  Yield to maturity--9%
 Callable--after 3 years@109 
  Duration to maturity--8.2 years  
 Duration to first call--2.1 years  
 a. Discuss the concept of call-adjusted duration and indicate the approximate value (range)   for it at the present time.  
 b.   Assuming   interest   rates   increase   substantially   (i.e.,   to   13   percent),   discuss   what   will   happen to the call-adjusted duration and the reason for the change. 
  c. Assuming interest rates decline substantially (i.e., they decline to 4 percent),discuss what   will happen to the bond's call-adjusted duration and the reason for the change.  
 d. Discuss the concept of negative convexity as it relates to this bond.

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