A treasury bond has maturity T = 10Y and pays at the end of each year a coupon of $5.00 on a face value of $100. The risk-free interest rate for all maturities is 4.0% with continuous compounding. The bond face value (notional) is $100.

i) compute the price of the bond.

ii) compute the duration and convexity of the bond.

iii) Suppose that the risk-free interest rate increases to 5%. Recalculate the bond price and compare with the result of the duration-convexity approximation

Answer rating: 100% (QA)

To compute the price of the bond we can use the formula for the present value PV of a bond PV C 1 1 rT r F 1 rT Where PV Present value price of the bo... View the full answer