Beljam plc. has issued bonds that pay interest semi-annually with the following characteristics:
Coupon 10%
Current price £203.75
Yield to maturity 8%
Maturity 15 years
Macaulay Duration 8 years
(a) Using the information provided, calculate the modified duration of the bond .
(b) Using the information provided and your answer to part (a), calculate the projected price change for the bond if the yield to maturity for this bond declines by 150 basis points.
(c) Explain why the modified duration is a better measure than maturity when calculating the bond’s sensitivity to changes in interest rates.
(d) Define convexity and explain why investors like it.