Question

Bond Y has a 30-year maturity, an 8% coupon, and sells at an initial yield-to-maturity (YTM) of 8 percent. The modified duration of Bond Y is 11.26 years and its convexity measure equals 212.40. If the bond's yield increases from 8% to 10% how much on a percentage basis is the Duration-With- Convexity Rule more accurate (Part 1)? Briefly explain the concept of Convexity Measure as it relates to Bond Y (Part 2):

Answer 1

Change in Bond Price = -Mod. Duration(Change in YTM) + 0.50(Convexity)(Change in YTM)2

Change in Bond Price = -11.26(0.02) + 0.50(212.40)(0.02)2

Change in Bond Price = -0.01827

Change in Bond Price = -1.827%