Answered step by step
Verified Expert Solution
Question
1 Approved Answer
A newly issued bond has a maturity of 10 years and pays a 7.4% coupon rate (with coupon payments coming once annually). The bond
A newly issued bond has a maturity of 10 years and pays a 7.4% coupon rate (with coupon payments coming once annually). The bond sells at par value. a. What are the convexity and the duration of the bond? Use the formula for convexity in footnote 7. (Round your answers to 3 decimal places.) Convexity Duration 7.406 63.126 years b. Find the actual price of the bond assuming that its yield to maturity immediately increases from 7.4% to 8.4% (with maturity still 10 years). Assume a par value of 100. (Round your answer to 2 decimal places.) Actual price of the bond $ 92.92 c. What price would be predicted by the modified duration rule AP = -D* Ay? What is the percentage error of that rule? (Negative answers should be indicated by a minus sign. Round your answers to 2 decimal places.) Percentage price change Percentage error % % d. What price would be predicted by the modified duration-with-convexity rule AP = -D* Ay + 1/2 Convexity (Ay)? What is the percentage error of that rule? (Negative answers should be indicated by a minus sign. Round your answers to 2 decimal places.) Percentage price change Percentage error %
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started