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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Question
A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon payments coming once annually). The bond sells at par value.
(i) What are the convexity and the duration of the bond?
(ii) Find the actual price of the bond assuming that its yield to maturity immediately increase from 7% to 8% (with maturity still 10 years).
(iii) What price would be predicted by the duration rule? What is the percentage error of that rule?
(iv) What price would be predicted by the duration-with-convexity rule? What is the percentage error of that rule?
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