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In: Finance

A 5-year bond with face value $1,000 (paid at maturity) and coupon rate 5% (coupon paid...

A 5-year bond with face value $1,000 (paid at maturity) and coupon rate 5%
(coupon paid in arrears annually) has yield-to-maturity 4.5%. What is the
convexity of the bond?

Solutions

Expert Solution

Calculation of convexity of the bond:

Excel Formulas:

Therefore,

convexity = [1 / (P x (1+Y)2)] x Σ [(cash flows in the tth period / (1 + Y)t ) x (t+t2)]

= 1 / [1021.9499 x (1+4.5%)2] x 27011.96

= 27011.96 / [1021.9499 x (1.045)2]

= 27011.96 / (1021.9499 x 1.092025)

= 27011.96 / 1115.99484

= 24.204

convexity of the bond is 24.204

Thank you, please give an upvote

jeff jeffy answered 2 years ago
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