Bond+Duration+Calculation

=Chapter 19 questions:= = 18. Duration is a measure that only works well for small changes in interest rates. Some bonds are affected by changing interest rates more than others. Convexity is a measure of the inaccuracy of duration. A bond with high convexity is one for which duration becomes inaccurate quickly as interest rates change. = 19. a. Pnew = Pold + D$ (change in yield)

= 99 + ( - 1017.72 ´ -.01) = 109.18 The new bond price estimate is 109.18 + 0.83 = 110.01

20. a. Pnew = Pold + D$ (change in yield)

= 95 + ( - 1043.10 ´ .0075) = 87.18

b. Convexity for this bond is 227.51. The change in price due to convexity is therefore

.5(227.51)(.0075)2 = 0.0064 = 0.64% The new bond price estimate is 87.18 + 0.64 = 87.82.