You have a 15-year maturity, 4% coupon, 6% yield bond with duration of 10.5 years and a convexity of 128.75. The bond is currently priced at $805.76. If the interest rate were to increase 200 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) = 10.5/1.06 = 9.906 −D*(Δy) = −9.906 × −2% = −19.81% 0.5(Convexity)(Δy)² = 0.5(128.75)(−2%)² = 2.575% ΔP/P = = −D*(Δy) + 0.5(Convexity)(Δy)² = −19.81% + 2.575% = −17.235% New price = $805.76 × (1 − 0.17236) = $666.88

You Have a 15-Year Maturity, 4% Coupon, 6% Yield Bond