(excel) Consider a 8% coupon bond making annual coupon payments with 4 years until maturity and a yield to maturity of 10%.
a.
Annual coupon rate | 8% | MDURATION function in excel | |
Yield | 10% | 3.237903803 | |
Settlement date | 4/10/2020 | ||
Maturity date | 4/10/2024 | ||
Payment frequency | 1 |
b.
Annual coupon rate | 8% |
Old Yield | 10% |
Settlement date | 4/10/2020 |
Maturity date | 4/10/2024 |
Payment frequency | 1 |
Redemption value | 100 |
New yield | 10.75% |
Using function PRICE in excel | |
Bond Price at old yield = 10% | Bond Price at new yield = 10.75% |
93.66026911 | 91.42253393 |
Percentage change in bond price => (91.4225-93.6602)*100/91.4225 = -2.4476% (decrease)
c. Change in bond price = Duration effect + convexity effect
= (- Modified duration * change in yield) + (0.5* convexity* (change in yield)^2)
= (-3.2379*0.0075)+(0.5*14.13*0.0075*0.0075)
= -0.02388
=-2.388%
New price using convexity-duration = 93.6602*(100-2.388)/100 = 91.4236
d. Percentage error = = 0.001203%
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