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Compute the the duration of bond

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Reference no: EM132674943

A six-year bond, with a Face Value of $1000 has yield rate of 5% compounded continuously, and coupon rate of 6% compounded semi-annually, paid every half-year. You are required to:

a) Compute the price of bond

b) Compute the the duration of bond

c) Compute the convexity of bond.

d) Use duration to estimate the effect of a 1% increase in the yield on the price of bond.

e) Use convexity to estimate the effect of a 1% increase in the yield on the the price of bond.

f) How accurate is the estimated price of the bond based on your answers in (d) and (e). Hint: You will need to calculate the price of the bond given a 1% increase of the yield and compare your answers with parts (d) and (e).

Reference no: EM132674943

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