Answer the questions for the bond below, which pays interest semi-annually.
The modified duration is 3.9944 years and convexity measure is 19.7636 years. ( assume par value is $1000).
Coupon rate = 9%
Current yield to maturity = 8%
Maturity= 5 years
1. calculate the price value of a basis point if the new yield to maturity is 8.01%
2. calculate the actual price of the bond for a 50 basis point increase in interest rates (8% to 8.5%)
3. Using duration, estimate the price of the bond for a 50 bp increase interest rates (8% to 8.5) 3. using both duration and convexity measures, estimate the price of the bond for a 50 bp increase in interest rates (8% to 8.5%)
4. compare your results in 3 and 4 and explain which is closer to the actual price.