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Estimate the percentage change in bond price

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Reference no: EM132788066

Consider a 30-year 3% coupon bond with semi-annual coupon payments. Currently, the price of the bond is $337.47. Based on the current yield to maturity, the bond has a duration of 12.2 years and convexity of 233.2 year2. Calculate the following for this bond:

-Yield-to-maturity (YTM).

-Modified duration.

-Using modified duration only, estimate the percentage change in bond price when YTM goes DOWN by 2%.

-Using modified duration AND convexity, estimate the percentage change in bond price when YTM goes DOWN by 2%.

-Now calculate the actual price of the bond with the YTM decreasing by 2%. What is the actual percentage change in bond value?

-Now compare your answers in part c) and d): which method leads to a more accurate estimate on the bond's value change?

Reference no: EM132788066

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