Explanation:
Using the duration-convexity approximation formula:
ΔP/P = -D_mod × Δy + 0.5 × C × Δy²
Duration effect = -D_mod × Δy = -9.42 × 0.003 = -0.02826 = -2.826%
Convexity effect = 0.5 × C × Δy² = 0.5 × 68.33 × 0.003² = 0.000307 = 0.0307%
Expected change in bond's price = -0.02826 + 0.000307 = -0.0279530 = -2.80%
Q.3553 A 9% bond has a full price of $905 and a YTM of 10%. Estimate the percentage change in the full price of the bond for a 30 basis point increase in YTM, assuming the bond's modified duration is 9.42, and its convexity is 68.33.
A
-2.65%
B
-2.83%
C
-2.80%
D
2.83%
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