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Up0
A corporate bond with a 4.25% coupon is priced at $104.03. This bond’s duration and reported convexity are 5.3 and 0.325. If the bond’s credit spread widens by 75 basis points due to a credit rating downgrade, the impact on the bondholder’s return is closest to?
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Up5
Does it show any working or explanation to go with the answer?
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Up4
I would agree with that, but the answer is -3.89. Not sure why…
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Up2
This is calculated using the Taylor series approximation using duration and convexity.
% change in Price = – Duration x change in yield + 1/2 x convexity x change in yield squared
so….
% change = – 5.3 x 0.0075 + 0.5 x 0.325 x 0.0075^2 = -0.03974 %
So the price will reduce by 3.974% from 104.03 to 99.90
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