A six$-$year bond with a continuously compounded yield of $6\%$ provides a $5\%$ coupon at the end of each year. Use duration and convexity to estimate the effect of a $1\%$ increase in the yield on the price of the bond.

Question $3$Answer

a$.$

Price will decrease by $5\mathrm{.}3\%$

b$.$

Price will decrease by $5\mathrm{.}16\%$

c$.$

Price will increase by $5\mathrm{.}16\%$

d$.$

Price will increase by $5\mathrm{.}3\%$