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Problem 6 Assume a 4-year Euro-note, with a $100,000 face value, a coupon rate of...

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Finance

Problem 6

Assume a 4-year Euro-note, with a $100,000 face value, a coupon rate of 10% and a convexity of 63.29. Today's YTM is 11.5%. Coupon frequency and compounding frequency are assumed to be annual. (a.) What is the duration of this bond? (b.) What is the exact price change in dollars if interest rates decrease by 50 basis points? (c.) Use the duration model to calculate the approximate price change in dollars if interest rates decrease by 50 basis points. (d.) What does convexity measure? Incorporate convexity to calculate the approximate price change in dollars if interest rates decrease by 50 basis points.

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