Question: A bond which has just been issued possess the below features : Coupon Yield-to-Maturity (YTM) Expiry Macaulay Duration 4% 4% 7 years 5 years Required:

A bond which has just been issued possess the below features :

Coupon

Yield-to-Maturity (YTM)

Expiry

Macaulay Duration

4%

4%

7 years

5 years

Required:

  1. Determine the modified duration based upon the above data.

  1. Modified duration is a better way to determine the bonds sensitivity to interest rate changes as compared to the expiry period of the bond. Do you agree with this statement ? Justify your stance by providing proper explanations.

  1. Determine the changes direction in modified duration under the following situations :
  1. The bonds coupon was 2%
  2. The bonds expiry was 3 years

  1. Provide the definition of convexity and discuss how modified duration and convexity are used to determine dP/dI (P : Bond price, I: Interest rate).

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