Consider a four-year bond with a face value of 100 and a, Ask an Expert

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Consider a four-year bond with a face value of $100 and a coupon rate of 20%. The term structure of interest rates is flat at 6%, i.e. yt = 6% for all t.

1) Now let's assume that the convexity of this bond is 13.47. Please estimate the price change by using both duration and convexity.

2) Would the dollar error using the duration approximation be larger or smaller if the term structure would shift from 15% to 16% (instead of from 6% to 7%)? Why?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92428958

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