Question

A fixed coupon bond with 4 years until maturity has a coupon rate of 5% paid annually and is currently trading at a yield of 4% p.a. Compute the following:

Calculate the Price of the bond.

Calculate the Duration and Modified Duration of the Bond

Answer this :Calculate the Convexity of the Bond

Answer 1

C =

Period	Cash Flow	Discounting factor	PV Cash Flow	Duration Calc	Convexity Calc
0	($1,036.30)	=(1+YTM/number of coupon payments in the year)^period	=cashflow/discounting factor	=PV cashflow*period	=duration calc*(1+period)/(1+YTM/N)^2
1	50.00	1.04	48.08	48.08	88.90
2	50.00	1.08	46.23	92.46	256.44
3	50.00	1.12	44.45	133.35	493.16
4	1,050.00	1.17	897.54	3,590.18	16,596.61
			Total	3,864.06	17,435.10

Convexity =(∑ convexity calc)/(bond price*number of coupon per year^2)

=17435.1/(1036.3*1^2)

=16.82