A newly issued bond has a maturity of 10 years and pays a 7% coupon rate...

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Finance

A newly issued bond has a maturity of 10 years and pays a 7%coupon rate (with coupon payments coming once annually). The bondsells at par value.
a. What are the convexity and the duration ofthe bond? Use the formula for convexity in footnote 7.(Round your answers to 3 decimal places.)
Convexity
Duration
b. Find the actual price of the bond assumingthat its yield to maturity immediately increases from 7% to 8%(with maturity still 10 years). Assume a par value of 100.(Round your answer to 2 decimal places.)
Actual Price of the Bond (%)
c. What price would be predicted by themodified duration rule ?PP=?D?y??PP=?D?y? What is the percentageerror of that rule? (Negative answers should be indicatedby a minus sign. Round your answers to 2 decimalplaces.)
Percentage Price change (%)
Percentage Error (%)

d. What price would be predicted by the modifiedduration-with-convexity rule?PP=?D?y+12×Convexity×(?y)2??PP=?D?y?+12×Convexity×(?y)2? What isthe percentage error of that rule? (Negativeanswers should be indicated by a minussign. Round your answers to 2 decimalplaces.)
Percentage Price Change (%)
Percentage Error (%)

Answer & Explanation Solved by verified expert

3.6 Ratings (572 Votes)

K NBond Price Coupon1 YTMk Par value1 YTMNk1K 10Bond Price 710001001 10100k 10001 1010010k1Bond Price 81566aPeriodCash FlowDiscounting factorPV Cash FlowDuration CalcConvexity Calc0815661YTMumber of coupon payments in the yearperiodcashflowdiscounting See Answer

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