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A newly issued bond has a maturity of 2 years and pays semiannual coupons at annual rate of 7%. The par value of the bond is $1,000 and it sells at par.

a. What are the convexity and the duration of the bond?

b. Find the actual price of the bond assuming that its yield to maturity immediately increases from 7% to 8% (with maturity still 2 years)

c. What price would be predicted by the duration rule (the formula for the price change in terms of duration)? What is percentage error of that rule?

d. What price would be predicted by the duration-convexity rule (the formula for the price change in terms of duration and convexity)? What is percentage error of that rule?

Basic Finance, Finance

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