Question

A bond is currently trading for 98.722 per 100 of par value. If the bond’s yield-to-maturity(YTM) rises by 10 basis points, the bond’s full price is expected to fall to 98.669. If thebond’s YTM decreases by 10 basis points, the bond’s full price is expected to increase to98.782. The bond’s approximate modified duration is closest to:

Answer 1

70.906

Step-by-step explanation:

The convexity of the bond is =70.906.

Working:

Convexity = [PV- + PV+ - (2 × PV0)]/(∆Yield2 × PV0)

where:

PV_ = new price when the yield-to-maturity is decreased

PV+ = new price when the yield-to-maturity is increased

PV0 = original price

∆Yield = change in yield-to-maturity

Convexity = [98.782 + 98.669 - (2 × 98.722)]/(0.0012 × 98.722) = 70.906