Question: Consider a 2-year bond whose par value is $1,000 and coupon rate is 6% per year, payable semi-annually. The bond's current price is such that

  1. Consider a 2-year bond whose par value is $1,000 and coupon rate is 6% per year, payable semi-annually. The bond's current price is such that its yield to maturity is 5.50% p.a., continuous compounding. Suppose that the yield declines by 0.1% (i.e., from 5.50%p.a. to 5.40%p.a.).
    1. Using the conceptof duration, what do you estimate the new bond price to be?
    2. Then, using both duration and convexity,what do you estimate the new bond price to be?
    3. What is the actual new bond price?

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