Assume a 2-year coupon bond, with a $1000 face value, a coupon rate of 8%. If today's YTM is 6% and term structure is flat. Coupon frequency and compounding frequency are assumed to be annual. 

a) What is the value (in dollar amount) of this bond? 

 b) What are the $Duration, Modified duration, and the Macaulay duration of this bond, respectively?

 

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c) What is the dollar convexity of this bond? (3 point) d) If interest rates increase by 2 percent, how much change in the bond value (dollar amount)? Use the duration measure only to estimate the absolute gain or loss. (2 points) e) If interest rates rise by 2 percent, how much change in the bond value (dollar amount)? Use the duration and convexity measures to estimate the absolute gain or loss. (3 points) c) What is the dollar convexity of this bond? (3 point) d) If interest rates increase by 2 percent, how much change in the bond value (dollar amount)? Use the duration measure only to estimate the absolute gain or loss. (2 points) e) If interest rates rise by 2 percent, how much change in the bond value (dollar amount)? Use the duration and convexity measures to estimate the absolute gain or loss. (3 points)

Answer rating: 100% (QA)

Lets begin by answering parts a and b of the question which pertains to the valuation of the bond and the calculation of its duration measures Well address each point stepbystep Please note that I can ... View the full answer