Multiple Choice Question

A bond has the following characteristics:

 Maturity: 10 years
 Bond equivalent yield: 6.5%
 Macaulay duration: 8.3 years
 Convexity: 56
 Non-callable

Assuming its yield to maturity increases by 100 basis points, what is the price change
for this bond considering both the duration effect and convexity effect?

a. -8.01%
b. -8.163%
c. -7.513%
d. -7.759%
e. -8.703%

Solutions:

Modified duration = 8.3 / (1 + .065/2) = 8.0388

Duration effect = -8.0388*.01 = -8.0388%

Convexity effect = 1/2*56*(.01)2 = 0.28%

Percentage price change = -8.0388% + 0.28% = -7.759%