A 20 year bond with an annual coupon of 10 has a duration of

A 20 year bond with an annual coupon of 10% has a duration of 10 years and a convexity of 136. The YTM of

the bond decreases from 8% to 7%. What is the actual percent change in bond price? What is the duration approximation of the percent change in bond price? What is the duration-with-convexity approximation of the percent change in bond price? Interpret your results.

Solution

Answer: Actual $ in bond price= -10*(-0.01)*100=

=10%

Duration=10 years*(1.1)=11 years