Calculate Dollar convexity and incorporate convexity

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Question - Assume a 3-year Euro-note, with a $10,000 face value, a coupon rate of 8%. Today's YTM is 11% and term structure is flat. Coupon frequency and compounding frequency are assumed to be annual.

a. What is the Macaulay duration of this bond?

b. What does convexity measure? Why does convexity differ among bonds? What happens to convexity when interest rates decrease? Why?

c. What is the exact price change in dollars if interest rates increase by 20 basis points (a uniform shift)?

d. Use the duration model to calculate the approximate price change in dollars if interest rates increase by 20 basis points.

e. Calculate Dollar convexity and incorporate convexity and duration to calculate the approximate price change in dollars if interest rates increase by 20 basis points.

Reference no: EM133045825

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