Duration and Convexity Project
Please use Excel to complete the problem below. Please submit your solution electronically.
Duration and Convexity
1. What is the duration of a 12-year, 7.7% semi-annual bond if the market rate on bonds of similar quality is 7.5%?
2. Now suppose that the YTM has changed to 7.53%%. Using Macaulay duration (which is practically the same as using modified duration since you need to divide by (1+y)), what is the approximate percent change in the price of the bond? (You do not need to recalculate Macaulay duration using 7.53%. Use the duration value that you found in Problem 1.)
3. Now include convexity to estimate the percent change in the price of the bond.