1. The Clarence Corporation has issued bonds that pay semiannually with the following characteristics:
|
Coupon
|
Yield to Maturity
|
Maturity
|
Macaulay Duration
|
|
8%
|
8%
|
15 years
|
10 years
|
a. Calculate modified duration using the information provided.
b. Explain why modified duration is a better measure than maturity when calculating the bond's sensitivity to changes in interest rates.
c. Identify the direction of change in modified duration if:
(1) the coupon of the bond were 4 percent, not 8 percent.
(2) the maturity of the bond were 7 years, not 15 years
d. Define convexity and explain how modified duration and convexity are used to ap- proximate the bond's percentage change in price, given a large change in interest rates.