Suppose a bond has 20 years left to maturity, an 8% coupon rate, pays interest semi-annually, and has a 6% yield to maturity. If this bond has a Macaulay duration of 11.23 years and a convexity of 170.26, and the yield to maturity increases 1%, an estimate of the percent price change in the bond due to both duration and convexity would be

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Quizplus · Accepted Answer

The percent price change in a bond due to duration and convexity can be estimated using the formula:  %ΔP ≈ -Duration × ΔY + 0.5 × Convexity × (ΔY)^2  Here, Duration = 11.23, Convexity = 170.26, and ΔY = 0.01 (1% increase in yield).  %ΔP ≈ -11.23 × 0.01 + 0.5 × 170.26 × (0.01)^2  %ΔP ≈ -0.1123 + 0.5 × 170.26 × 0.0001  %ΔP ≈ -0.1123 + 0.008513  %ΔP ≈ -0.103787 or -10.38%  The closest option is C) -10.05%.

Suppose a Bond Has 20 Years Left to Maturity, an 8