1) A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupons coming once annually). The bond sells at par.
a) What are the convexity and duration of the bond?
b) Find the actual price of the bond assuming that its yield-to-maturity immediately increases from 7% to 8% (with maturity still at 10 years).
c) What price would be predicted by the duration equation (equation 16.3)? What is the percentage error of that calculation?
What price would be predicted by the duration-with-convexity rule (equation 16.5)? What is the percentage error of that calculation?
Step-by-step solution1. Step 1 of 11a)Convexity is the curvature of the bond’s price and yield relationship.The following table-A shows the calculation o convexity of a 10-year, 7%coupon…