Question 5

Question 5. A six—year bend, with a Face Value of $1000 has yield rate of 5% compounded continuously, and coupon rate of 5% 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 e?'ect 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 0 increase of the yield and compare your answers with parts (d) and (e). [30 marks] "END" FM305 — Financial Risk Management