3. A newly issued bond has the following characteristics: Coupon Yield to Maturity Maturity Macaulay Duration 8%
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3. A newly issued bond has the following characteristics:
Coupon Yield to Maturity Maturity Macaulay Duration 8% 8% 15 years 10 years
a. Calculate modified duration using the information above.
b. Explain why modified duration is a better measure than maturity when calculating the bond’s sensitivity to changes in interest rates.
c. Identify the direction of change in modified duration if:
i. The coupon of the bond were 4%, not 8%.
ii. The maturity of the bond were 7 years, not 15 years.
d. Define convexity and explain how modified duration and convexity are used to approximate the bond’s percentage change in price, given a change in interest rates.
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