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A 9-year maturity, AAA rated corporate bond has a 6% coupon rate. The bond's promised yield...

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Finance

A 9-year maturity, AAA rated corporatebond has a 6% coupon rate. The bond's promised yield is currently5.75%. The bond pays interest semiannually.

  1. What is the bond's duration?
  2. What is the bond's convexity?
  3. If promised yields decrease to 4.85% what is the bond'spredicted new price, excluding convexity? What is the bond'spredicted new price including convexity?
  4. If promised yields increase to 6.5% what is the bond'spredicted new price, excluding convexity? What is the bond'spredicted new price including convexity?
  5. Based on your result in part c and d), would you prefer to havea bond with more or less convexity? Explain.

Answer & Explanation Solved by verified expert
4.0 Ratings (560 Votes)
Macaulay duration is calculated aswhere CF cash flow at time period t i periodic yield and Vb current bond priceModified duration is calculated as Macaulay    See Answer
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A 9-year maturity, AAA rated corporatebond has a 6% coupon rate. The bond's promised yield is currently5.75%. The bond pays interest semiannually.What is the bond's duration?What is the bond's convexity?If promised yields decrease to 4.85% what is the bond'spredicted new price, excluding convexity? What is the bond'spredicted new price including convexity?If promised yields increase to 6.5% what is the bond'spredicted new price, excluding convexity? What is the bond'spredicted new price including convexity?Based on your result in part c and d), would you prefer to havea bond with more or less convexity? Explain.

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