Question

Consider a zero-coupon bond with $100 face value that matures in seven years and has a yield of 7%.

i) What is the price when we assume that the (discrete) compounding frequency is semiannual?

ii) What is the bond’s modified duration?

iii) Use the modified duration to find the approximate changes in price if the bond yield rises by 10, 20, 50, 100 and 200 basis points.

iv) evaluate the same bond price if rates changes by -200 bps, -100 -50 -10 -5 0 +5. +200 (bps: 1/10,000 % ie. 200 bps= 2% ) use dp/P approximation=-D (dr) then use convexity adjustment to correct the approximation error?

Answer 1

(i, ii)

(iii)