Answer-first summary for fast verification
Answer: 8.49 years^2
Use the convexity formula based on discounted cash flows: \[ C = \frac{\sum t^2 \cdot PV(CF_t)}{P} \] From the bond pricing in Question 161.1: - \(PV(CF_1) \approx 3.767\) - \(PV(CF_2) \approx 3.547\) - \(PV(CF_3) \approx 86.868\) - \(P \approx 94.182\) Then: \[ C = \frac{1^2(3.767) + 2^2(3.547) + 3^2(86.868)}{94.182} \approx \frac{799.77}{94.182} \approx 8.49 \] So the correct answer is **B**.
Author: Manit Arora
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Question 161.2. As convexity is the weighted average of maturity-squared, what is this bond’s convexity (i.e., 3-year, $100 par, 4.0% annual coupon with 6.0% continuously compounded yield)?
A
6.88 years^2
B
8.49 years^2
C
8.88 years^2
D
9.00 years^2
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