The convexity correction is calculated

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IT is March 12, 2017. You have a $10,000 semi-annual bond with a coupon rate of 14.000% which matures September 24, 2021. The bond is priced to yield 7.625%, the duration is 3.44 years, and the convexity is 14.77 years squared.

Using a duration estimate only, we predict that if market yields increase by 150 basis points then the price of this bond will decrease by:

The convexity correction is calculated as:

So the total decrease in price is predicted to be:

Reference no: EM131972883

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