The Clarence Corporation has issued bonds that pay semiannually with the following characteristics:

a. Calculate modified duration using the information provided.
b. Explain why modified duration is a better measure than maturity when calculating the bond’s sensitivity to changes in interest rates.
c. Identify the direction of change in modified duration if: (1) The coupon of the bond were 4 percent, not 8 percent. (2) The maturity of the bond were 7 years, not 15 years
d. Define convexity and explain how modified duration and convexity are used to approximate the bond’s percentage change in price, given a large change in interestrates.

  • CreatedDecember 17, 2014
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