Question

A bond has a 25-year maturity, 10% coupon, 10% yields, $1000 face value, a duration of 10 years and a convexity if 135.5. Calculate the new value of the bond (in $), based on modified duration and convexity, if interest rates were to fall by 125 basis points.

Answer #1

Since the coupon rate and YTM are equal (10%), current price is equal to face value of $1,000.

Fall in YTM by 125 basis points corresponds to change in yield by -1.25% or, -0.125

New value upon fall in YTM by 125
basis points, based on Duration and convexity rule=
**$1,124.22**

Calculation as follows:

A bond has a 25-year maturity, 10% coupon, 10% yields, $1000
face value, a duration of 10 years and a convexity if 135.5.
Calculate the new value of the bond (in $), based on modified
duration and convexity, if interest rates were to fall by 125 basis
points.
Please show the working/formulas if done in excel.

1. What is the duration of a 10-year zero-coupon bond with a par
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interest rate were to fall 75 basis points, what is your predicted
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Suppose that you have a 20-year maturity, 12% coupon, 12% yield
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sells at par, which means the current price equals its face value,
$1,000.
$1,104.56
$1,113.41
$1,124.22
$1,133.35

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is 9.58 years and convexity is 141.03.
(1) What is the bond’s modified duration? (2 points)
(2) What is the percentage price change if interest rate were to
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(3) What is the estimated price with 125 basis points decrease
in yield? (4 points)

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a duration of 10 years and a convexity of 135.6. If the interest
rate were to fall 126 basis points, your predicted new price for
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a.
$1,114.40
b.
$1,103.64
c.
$1,090.83
d.
$1,125.20

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