Question
Consider a bond with annual payments of $100, a principal payment of $1,000 in 10 years, and a cost of $1000. The Duration of the
Consider a bond with annual payments of $100, a principal payment of $1,000 in 10 years, and a cost of $1000. The Duration of the bond is 6.759 and the Convexity of the bond is 52.792, assuming a flat yield curve with a 10% yield-to-maturity and annual compounding.
Suppose now the flat yield curve shifts up to a 12% yield to maturity.
What is the estimated percentage price change using both Duration and Convexity measures?
What is the actual percentage price change?
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Modern Portfolio Theory and Investment Analysis
Authors: Edwin Elton, Martin Gruber, Stephen Brown, William Goetzmann
9th edition
9781118805800, 1118469941, 1118805801, 978-1118469941
