Question

A newly issued bond has a maturity of 10 years and pays a 7.7% coupon rate (with coupon payments coming once annually). The bond sells at par value. a. What are the convexity and the duration of the bond? Use the formula for convexity in footnote 7

Answer 1

The convexity of the bond is 61.810 and the duration of the bond is 7.330 years.                                                                                                      

Explanation:

• A newly issued bond has a maturity of 10 years. It pays a 7.7% coupon rate. The coupon payments will receive each year. Using the coupon payments the year will be reduced.
• The maturity year will get reduced. So the duration of the bond is approximately 7.330 years. If the bond is sold at par value the convexity can be calculated using the number of years.
• So the convexity of the bond is 61.810.