Derivative and Fixed Income Securities - Calculation, Graph and Duration

This article discusses the calculation of cash price of bond, constructing graph and discussing relationship between bond price and yield-to-maturity, computing duration of bond and more in Derivative and Fixed Income Securities. It includes tables and graphs to explain the concepts and is relevant for finance students.

Running head: DERIVATIVE AND FIXED INCOME SECURITIES
Derivative and Fixed Income Securities
Name of the Student:
Name of the University:
Authors Note:

DERIVATIVE AND FIXED INCOME SECURITIES
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Table of Contents
Question A1: Calculating the cash price of the bond on 10 October 2018................................2
Question A2: Constructing the graph and discussing the relationship between bond price and
yield-to-maturity........................................................................................................................2
Question A3: Computing the duration of bond on 10 July 2018, while discussing the graph
results.........................................................................................................................................3
References:.................................................................................................................................4

DERIVATIVE AND FIXED INCOME SECURITIES
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Question A1: Calculating the cash price of the bond on 10 October 2018
The cash price for bond is mainly at the level of 129.17 for 10-July-2018, after
conducting the relevant calculations. On the other hand, cash price of bond at the time line of
10-October-2018 is at the levels of 145.66, where yield to maturity is at the levels of 4%.
Question A2: Constructing the graph and discussing the relationship between bond
price and yield-to-maturity
0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
0
50
100
150
200
250
Relation etween ond rice and yield to maturityB B P - -
90 95 100 105 110 115 120 125 130 135 140 145 150 155 160 165
The above graph represents the level of change in bond price with the alternation int h
current yield of the bond. The lower yield mainly increases the value of bond, which can be
seen from the above graph, while in the increment in yield reduces the price of bond. This
directly indicates that the increment in the yield will eventually reduced the attractiveness of
the bond and minimise the value of the bond in future. In this context, Fontaine, Pinnington
and Walton (2017) stated that increment in the current inflation rate will reduce the
attractiveness of the bonds, as its value will deteriorate in future due to the impact of time

DERIVATIVE AND FIXED INCOME SECURITIES
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erosion effect. This same effect is hindering the bond value with the changes in the current
yield-to-maturity, as seen in the above graph.
Question A3: Computing the duration of bond on 10 July 2018, while discussing the
graph results
0% 2% 4%
5.85
5.9
5.95
6
6.05
6.1
6.15
6.2
6.25
Coupon and interest rate on duration
5% 5.00% 5.25% 5.50% 5.75% 6.00%
From the calculation the duration of the bond is calculated to be at the levels
of 9.39. Moreover, the relationship between the coupon rate, interest rate and duration of the
bond is mainly witnessed in the above growth. The changes in the current yield value is
directly altering duration of the bond. Hence, duration of the bond is directly affected by the
changes in the current value coupon rate and yield-to-maturity, which can be seen from the
above graph. Therefore, it can be seen that the increment in yield-to-maturity will directly
reduce the duration of the bond, as the values has been declining as seen in the graph.
Consequently, the increment in coupon rate and interest rare will directly reduce the duration
of bond (Hawawini 2017).

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References:
Fontaine, J.S., Pinnington, J. and Walton, A., 2017. What Drives Episodes of Settlement Fails
in the Government of Canada Bond Market?. Bank of Canada.
Hawawini, G., 2017. The Mathematics of Macaulay’s Duration. In Bond Duration and
Immunization (pp. 47-55). Routledge.