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Consider a 2-year bond whose par value is $1,000 and coupon rate is 6% per year, payable semi-annually. The bond's current price is such that
- Consider a 2-year bond whose par value is $1,000 and coupon rate is 6% per year, payable semi-annually. The bond's current price is such that its yield to maturity is 5.50% p.a., continuous compounding. Suppose that the yield declines by 0.1% (i.e., from 5.50%p.a. to 5.40%p.a.).
- Using the conceptof duration, what do you estimate the new bond price to be?
- Then, using both duration and convexity,what do you estimate the new bond price to be?
- What is the actual new bond price?
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