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A bond has a 25-year maturity, 10% coupon, 10% yields, $1000 face value, a duration of...

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.

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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:

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