Assume the following characteristics of a bond: Selling at 96.000, 2.5% coupon, annual pay, 12 years until maturity. Use the short-cut methods to determine the Approximate Modified duration and Approximate Convexity Measure of the bond (I suggest using 10 bps as the annual change in yield). Now, under the assumption that yields will increase by 60 bps, what do you expect to be the new price of the bond?

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Loanable Funds Theory

The loanable funds theory is a neoclassical theory that determines the interest rate where the demand for loanable investments and supply of loanable funds intersect. To determine the interest rate, this theory employs linear regression and a demand curve. At the equilibrium point, demand for borrowings and demand for the issuance of borrowing funds are inextricably linked. This point of equilibrium should equalize demand and the supply of money available for borrowing.