A bond which has just been issued possess the below features : Coupon= 4% Yield-to-Maturity (YTM) =
Question:
A bond which has just been issued possess the below features :
Coupon= 4%
Yield-to-Maturity (YTM) = 4%
Expiry = 7 years
Macaulay Duration = 5 years
Required:
(a)Determine the modified duration based upon the above data.(2 marks)
(b)Modified duration is a better way to determine the bond's 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.(4 marks)
(c)Determine the change's direction in modified duration under the following situations :
(i)The bond's coupon was 2% (1 mark)
(ii)The bond's expiry was 3 years(1 mark)
(d)Provide the definition of convexity and discuss how modified duration and convexity are used to determine dP/dI (P : Bond price, I: Interest rate). (4 marks)