The West India Corporation has issued bonds that pay semiannually with the following characteristics: Coupon...
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The West India Corporation has issued bonds that pay semiannually with the following characteristics: Coupon Yield to Maturity Maturity Macaulay Duration 8% 8% 15 years 10 years a) Calculate modified duration using the information provided. b) Explain why modified duration is a better measure than maturity when calculating the bond's sensitivity to changes in interest rates. c) Identify the direction of change in modified duration if: i) the coupon of the bond were 4 percent, not 8 percent. ii) the maturity of the bond were 7 years, not 15 years. d) Define convexity and explain how modified duration and convexity are used to approximate the bond's percentage change in price, given a large change in interest rates. [20 marks]
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