Discuss the impact when you include the convexity effect

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Reference no: EM131508610

A bond for the Chelle Corporation has the following characteristics:

Maturity—12 years

Coupon—10%

Yield to maturity—9.50%

Macaulay duration—5.7 years

Convexity—48

Noncallable

a. Calculate the approximate price change for this bond using only its duration, assuming its yield to maturity increased by 150 basis points. Discuss (without calculations) the impact when you include the convexity effect.

b. Calculate the approximate price change for this bond (using only its duration) if its yield to maturity declined by 300 basis points. Discuss (without calculations) what would happen to your estimate of the price change if this was a callable bond.

Reference no: EM131508610

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