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Consider a bond that pays $50 semi-annual interest and has a remaining life of 10 years....

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Finance

Consider a bond that pays $50 semi-annual interest and has aremaining life of 10 years. The bond currently sells for $987 andhas a yield to maturity of 10.20%.

a. What is the bond’s duration?
b. What is its modified duration?
c. What is its convexity?
d. What percentage change in bond price would be expected forone percent decrease in interest rate?

Answer & Explanation Solved by verified expert
4.2 Ratings (607 Votes)
50 Semi annual Interest means 100 annual interest or yield of bond is 10 on 1000 Bond value Duration time weighted PV PV of cash flows Convexity PVt2t 1i2 PV Modified Duration is Duration 1yk Where y is the Yield to Maturity and k is the number of periods in a year As shown in the calculations below Duration 652 Convexity 2099 Modified Duration 620 D For 1 decrease in the    See Answer
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Transcribed Image Text

Consider a bond that pays $50 semi-annual interest and has aremaining life of 10 years. The bond currently sells for $987 andhas a yield to maturity of 10.20%.a. What is the bond’s duration?b. What is its modified duration?c. What is its convexity?d. What percentage change in bond price would be expected forone percent decrease in interest rate?

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