Consider the following information and assume that both bondspay interest semi-annually, so
that below are semiannual bond equivalent yields.
| A |
| Coupon | 8 |
| YTM | 8 |
| Maturity | 2 |
| Par | 100 |
| Price | 100 |
1. Calculate the Macaulay duration of bond A.
2. Calculate the modified duration of bond A.
3. Compute the approximate modified duration for bonds A B usingthe shortcut formula by changing yields by 20 basis points andcompare your answers with those calculated in the last question.Hint: calculate the price of the bond when interest rate increaseby 20 bsp and decrease by 20 bsp. Then plug in the formula we havein class.
4. Compute the approximate convexity measure for both bonds A(use 10 bsp as the change in interest rate) Hint: calculate theprice of the bond when interest rate increase by 10 bsp anddecrease by 10 bsp. Then plug in the formula we have in class.
Round to 4 decimal places.
