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A bond with face value = 5,000 currently trades at par. Its Macaulay duration is 3.42...

A bond with face value = 5,000 currently trades at par. Its Macaulay duration is 3.42 years and its convexity is 68.47. Suppose yield currently is 3.95%, and is expected to change to 5.54%. Calculate the approximate dollar change in price using both duration and convexity. Assume annual compounding. Round your answer to 2 decimal places.

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Expert Solution

Modified Duration = 3.42/1.0395 = 3.29 years

Change in Price = -3.29(-0.0159) + 0.50(68.47)(-0.0159)2

Change in Price = 6.10%

Dollar Change = 0.061(5,000)

Dollar Change = $304.83

jeff jeffy answered 2 years ago
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