Consider a 2-year semiannual bond with annual coupons of 5% and face value of $1,000. The bond’s annual yield-to-maturity is 4% compounded semiannually.
a) Estimate the bond’s duration and convexity.
b) Estimate the new bond prices using the duration adjustment when the annual yield changes by 1% and -0.5%.
c) Estimate the new bond prices using the duration and convexity adjustment when the annual yield changes by 1% and -0.5%.