You have a 25-year maturity, 10% coupon, 10% yield bond with a duration of 10 years and a convexity of 135.5. If the interest rate were to fall 125 basis points, your predicted new price for the bond (including convexity) is ________.

Question

Quizplus · Accepted Answer

ΔP/P = −D*(Δy) + 0.5(Convexity)(Δy)² D* = D/(1 + y) = 10/1.1 = 9.091 −D*(Δy) = −9.091 × −1.25% = 11.36% 0.5(Convexity)(Δy)² = 0.5(135.5)(−1.25%)² = 1.0586% ΔP/P = = −D*(Δy) + 0.5(Convexity)(Δy)² = 11.36% + 1.0586% = 12.42% Since the bond's coupon rate was equal to its original yield to maturity, the original price was $1,000. New price = $1,000 × 1.12422 = $1,124.22

You Have a 25-Year Maturity, 10% Coupon, 10% Yield Bond