1. Consider a 5-year, 5%-coupon bond with a yield of 7%. Assume annual coupon payments and...
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1. Consider a 5-year, 5%-coupon bond with a yield of 7%. Assume annual coupon payments and annual compounding. (a) Compute the Modified duration and the convexity of the bond. (b) Using duration and convexity, estimate a relative change in bond value due to an increase in yield of 0.1%, 1%, and 10%. Compare it to the actual relative change in the bond price. Comment on the quality of the duration-convexity approximation. 1. Consider a 5-year, 5%-coupon bond with a yield of 7%. Assume annual coupon payments and annual compounding. (a) Compute the Modified duration and the convexity of the bond. (b) Using duration and convexity, estimate a relative change in bond value due to an increase in yield of 0.1%, 1%, and 10%. Compare it to the actual relative change in the bond price. Comment on the quality of the duration-convexity approximation.
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