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mote1985 [20]
3 years ago
7

It is May 18, 2017. You have a $10,000 semi-annual bond with a coupon rate of 10.375% which matures May 5, 2044. The bond is pri

ced to yield 13.500%, the duration is 7.81 years, and the convexity is 99.87 years squared. Using a duration estimate only, we predict that if market yields increase by 50 basis points then the price of this bond will decrease by _________ % (percent, rounded three places after the decimal)
Business
1 answer:
Keith_Richards [23]3 years ago
3 0

Answer:

-3.91%.

Explanation:

The Duration Adjustment (% change in bond price) is given by:

= (Duration) * (Change in yield in %)

= -(7.81) x (0.5%)

= -3.91%

The Convexity Adjustment is given by:

= 0.5 * Convexity *  (Change in yield, as a fraction)^2

= 0.5 * 99.87 * (0.005)^2

= 0.5 * 99.87 * 0.000025

= 0.001248375

= 0.0012%

Thus, the convexity correction is 0.0012%

Thus, the total change in bond price = -3.91% + 0.0012% = -3.91%.

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