A five-year, 5.0% bond with a YTM of 6.5% has a duration of 4.53 and convexity of 26.26. The bond's current price quote is 93.766. Assume the bond pays annual coupons and has a par value of $1.000. a. Compute the percentage change in the bond's price if its YTM increases 50 basis points. b. Estimate the percentage change in the bond's price using modified duration and the convexity correction (the duration & convexity rule) if the bond's YTM increases 50 basis points. c. Compute the percentage change in the bond's price if its YTM decreases 85 basis points. d. Estimate the percentage change in the bond's price using modified duration and the convexity correction (the duration & convexity rule) if the bond's YTM decreases 85 basis points.

A five-year, 5.0% bond with a YTM of 6.5% has a duration of 4.53 and convexity of 26.26. The bond's current price quote is 93.766. Assume the bond pays annual coupons and has a par value of $1.000. a. Compute the percentage change in the bond's price if its YTM increases 50 basis points. b. Estimate the percentage change in the bond's price using modified duration and the convexity correction (the duration & convexity rule) if the bond's YTM increases 50 basis points. c. Compute the percentage change in the bond's price if its YTM decreases 85 basis points. d. Estimate the percentage change in the bond's price using modified duration and the convexity correction (the duration & convexity rule) if the bond's YTM decreases 85 basis points.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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