CFA Examination Level II
a. Using the information in the following table, calculate the projected price change for Bond B if the yield to maturity for this bond falls by 75 basis points.
b. Describe the shortcoming of analyzing Bond A strictly to call or to maturity. Explain an approach to remedy this shortcoming.
| MONTICELLO CORPORATION BOND INFORMATION | ||
| Bond A (Callable) | Bond B (Noncallable) | |
| Maturity | 2012 | 2012 |
| Coupon | 11.50% | 7.25% |
| Current price | 125.75 | 100 |
| Yield to maturity | 7.70% | 7.25% |
| Modified duration to maturity | 6.2 | 6.8 |
| Convexity to maturity | 0.5 | 0.6 |
| Call date | 2006 | — |
| Call price | 105 | — |
| Yield to call | 5.10% | — |
| Modified duration to call | 3.1 | — |
| Convexity to call | 0.1 | — |