Explore BrainMass

Explore BrainMass

    Effective Bond Duration; effective convexity; price change

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Problem:

    5.Calculate the effective duration of a bond to a 100 basis point change in interest rates with a 6-1/4 coupon, 10-years remaining to maturity, and an asking quote of 110.7811 (decimal, not 32nds).

    Calculate the effective convexity to a 100 basis point change of the bond in Question 5.

    Calculate the total percentage price change (duration and convexity) to a 65 basis point decrease in interest rates for the bond in Questions 5 and 6.

    © BrainMass Inc. brainmass.com June 3, 2020, 10:28 pm ad1c9bdddf
    https://brainmass.com/business/discounted-cash-flows-model/effective-bond-duration-effective-convexity-price-change-233059

    Solution Preview

    Please refer attached file for complete description. Some of formulas may be missing here.

    Solution:

    Calculate the effective duration of a bond to a 100 basis point change in interest rates with a 6-1/4 coupon,
    10-years remaining to maturity, and an asking quote of 110.7811 (decimal, not 32nds).

    Face Value of bond=100
    Price of bond Po=110.7811
    Coupon rate 6.25% of face value=6.25
    Time to maturity=10 years

    Let us calculate YTM of a bond using IRR function in MS Excel

    Year End Cash flow
    0 -110.7811 (Price of bond)
    1 6.25 Coupon payment
    2 6.25 Coupon payment
    3 6.25 Coupon payment
    4 6.25 ...

    Solution Summary

    Solution describes the steps for calculating effective bond duration, effective convexity and total percentage price change.

    $2.19

    ADVERTISEMENT