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dmitriy555 [2]
3 years ago
5

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
Business
1 answer:
Sliva [168]3 years ago
3 0

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

<u>Explanation</u>:

  • 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.                                                                            

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Answer:A. $24,000

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Explanation:

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4% is the desired real rate of interest because that's the rate at which the investor is willing to buy the goods in future.

2% is the expected inflation rate over the period because at that rate, there's expectation of future rise in price while 6% is the approximate nominal rate of interest required which is the addition of the 4% and the 2%.

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