Homework Answers
Market value of the bond: $11 million
book value of the bond: $10 million
Current gain of the bond: 11 -10 : $ 1 million (Answer)
Percentage Price Change = Duration Effect + Convexity Effect
= [- Duration * Change in BP * 100] + [ (1/2) * Convexity * (Change in BP)^2 * 100]
Where BP = Basis Point
Considering this formula, when the Change in BP is +100BP, then %change in price is as follows:
[-3.14*0.01*100] + [(1/2)*(-2.52)*(0.01)^2*100] = -3.1526% (Answer)
When the change in BP is -100BP, then the % change in price is as follows:
[-3.14*(-0.01)*100] + [(1/2)*(-2.52)*(-0.01)^2*100] = 3.1274% (Answer)
Considering this formula, when the Change in BP is +200BP, then %change in price is as follows:
[-3.14*0.02*100] + [(1/2)*(-2.52)*(0.02)^2*100] = -6.3304% (Answer)
When the change in BP is -200BP, then the % change in price is as follows:
[-3.14*(-0.02)*100] + [(1/2)*(-2.52)*(-0.02)^2*100] = 6.2296% (Answer)
| BP Change | %Change in Price | New Bond Price* | Price Gain/ Loss (Answer) |
| 100 | -3.15% | 10.99653 | 0.99653 |
| 200 | -6.33% | 10.99304 | 0.99304 |
| -100 | 3.13% | 11.00344 | 1.00344 |
| -200 | 6.23% | 11.00685 | 1.00685 |
*New bond price is calculated as market price * (1+%change in price).
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