Consider a 3-year 12% coupon bond, with a par value of $100, and which has just paid
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Question:
Consider a 3-year 12% coupon bond, with a par value of $100, and which has just paid a coupon. The yield curve is flat at 9.25% pa. Coupons are paid annually.
a) Calculate the duration. Use the duration to make a first approximation of the percentage capital gain or loss if the yield increases by 25 basis points.
b) Calculate the convexity adjustment. Use this adjustment to make a second approximation of the percentage capital gain or loss if the yield increases by 25 basis points.
c) Calculate the exact percentage capital gain or loss if the yield increases by 25 basis points.
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