Duration of bond ABC is 6.67 years and its convexity is 135. If that bond has...
Duration of bond ABC is 6.67 years and its convexity is 135. If that bond has current price of 107, yield to maturity of 5% and if yields decrease by 1.25%, what would be the new price of this bond? Explain.
Homework Answers
| New bond price @ YTM =3.75 using duration and convexity |
| Mod.duration prediction = -Mod. Duration*Yield_Change*Bond_Price | |||||||||
| =-6.67*-0.02297*107 | |||||||||
| =16.3934593 | |||||||||
| Convexity adjustment = 0.5*convexity*Yield_Change^2*Bond_Price | |||||||||
| =0.5*135*-0.02297^2*107 | |||||||||
| =3.81074195025 | |||||||||
| New bond price = bond price+Mod.duration pred.+convex. Adj. | |||||||||
| =107+16.39+-1.66 | |||||||||
| =127.2 |
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