A $100 000 bond has a term to maturity of one year,with half-yearly coupons set at 12% p.a.Calculate the convexity of the bond in periods if the yield is 9%.

A) $ 2.576 $
B) $ 2.888 $
C) $ 3.227 $
D) $ 4.672 $

Question

A $100 000 bond has a term to maturity of one year,with half-yearly coupons set at 12% p.a.Calculate the convexity of the bond in periods if the yield is 9%.

A) $ 2.576 $
B) $ 2.888 $
C) $ 3.227 $
D) $ 4.672 $

Quizplus · Accepted Answer

The present value (PV)of the first cash flow (i.e.coupon payment of $6000 received after six months)is $5741.63,and the PV of the second cash flow (i.e.the second coupon of $6000 and the face value of $100 000 after 12 months)is $97 067.37,which gives a bond price of $102 809.00.The weights of the PV of each cash flow are $5741.63/$102809.00 = 0.056,and $97067.37/$102809.00 = 0.944,which can be inserted into equation 6.11,which gives a convexity of 2.888.

A $100 000 Bond Has a Term to Maturity of One