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Duration and convexity of a bond

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Calculate the duration and convexity of a two-year bond, with an 8% coupon rate (coupons are paid semiannually), 10% yield-to-maturity and a face value of ?1000. If the yield increases by 50 basis points (=0.5%), how much does the price change? How incorrect is the linear estimation?

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The solution calculates the duration and convexity of a bond.

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Calculate the duration and convexity of a two-year bond, with an 8% coupon rate (coupons are paid semiannually), 10% yield-to-maturity and a face value of ?1000.

Semi annual coupon
N= 2 years
Number of periods in a year = 2
Number of periods= Number of half years = 4 =2x2
Coupon rate= 8.00%
FV= ? 1,000
Therefore interest per period= ? 40.00 =1000 x 8.% /2
YTM= 10.00%
YTM per period= 5.00% =10.% / 2

period (n) time (t) Cash flow PVIF ...

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