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1. The Clarence Corporation has issued bonds that pay semiannually with the following characteristics:

Coupon	Yield to Maturity	Maturity	Macaulay Duration
8%	8%	15 years	10 years

a. Calculate modified duration using the information provided.

b. Explain why modified duration is a better measure than maturity when calculating the bond's sensitivity to changes in interest rates.

c. Identify the direction of change in modified duration if:

(1) the coupon of the bond were 4 percent, not 8 percent.

(2) the maturity of the bond were 7 years, not 15 years

d. Define convexity and explain how modified duration and convexity are used to ap- proximate the bond's percentage change in price, given a large change in interest rates.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M91855508

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