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Consider a bond with the following terms: 1 0 years to maturity $ 1 , 0 0 0 face value Coupons are paid 2 times
Consider a bond with the following terms:
years to maturity
$ face value
Coupons are paid times per year
Annual coupon rate is
For problems assume a constant discount rate across maturities has increased from to Also, assume that the bond will make its next coupon payment in exactly years.
Find the exact price of the bond under the new discount rate.
Approximate the new bond price using modified duration.
Repeat the approximation using modified duration and convexity
How far off was the MoD approximation from the exact answer?
Explain why the modified duration approximation yielded a different answer than the actual approximation.
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