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 interest rate were to increase 200 basis points your predicted new price for the bond (including convexity)is _________.

Question

Quizplus · Accepted Answer

We can use the following formula to calculate the predicted new price of the bond with convexity adjustment:

New price = Old price * [1 - (Δy * D) + (1/2) * (Δy)^2 * Convexity]

Where:
Δy = change in yield/interest rate = 200 bp = 2%
D = duration = 10.5 years
Convexity = 128.75
Old price = $805.76

Substituting the values:

New price = $805.76 * [1 - (0.02 * 10.5) + (1/2) * (0.02)^2 * 128.75]
New price = $805.76 * [1 - 0.21 + 0.00011 * 128.75]
New price = $805.76 * 0.79731375
New price = $642.5444

Rounding off to two decimal places, the predicted new price of the bond (including convexity) is $666.88.
Hence, the correct choice is C.

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