Question

Given a 10 year ZCB trading with a 5% yield, calculate the modified duration of the bond and determine the price change given an instantaneous shift in yields by 1%. What would be the difference in the calculated price change if a convexity adjustment is applied? Would this adjustment be larger given a larger shift in yields?

Answer 1

Answer: (a) Computation of modified duration :- Duration It YTM YTM 1+0.05 (+ YTM) + + (c-itly) c{1+ y rmje-i) + y2) (1+0.09) + 10 (0-0.05) o [ecto agile J+0.05 1.05 +0.05) (-10) 0.05 1:05 0.05 0 +0.05 = 21-11 =10 Normal duration modified Duration : It YTM 10 =9.5238 of It means the change in yield is 1%, then the change in price would be 9.5238%. using, Cunverity & % change in price bond due to change in YTM [-(modo duration) (Vield change itu ( wild change) - (2-129. 5238) (+)] + 10 200 - 9.5238 means C at then price of the change in % of gield is 1%, bond would change by 9.5138%

Yes. If the yield change is more than 1%, then the adjurtment in price would also be larger. However, bond price computed using modified duration is only an need to use bund approximate. For exact price, we Convenity.

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