What is meant by bonds duration

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Reference no: EM131445551

1. What is meant by a bonds duration? Why is it important for an investor to understand this concept?

2. Assume a 2-year Euro-note, with a $100,000 face value, a coupon rate of 10% and a convexity of 4.53. If today’s YTM is 11.5% 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 rise? Why?

Reference no: EM131445551

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