Question

A fund manager is considering incorporating a bond investment into the company's

investment portfolio. The manager is interested to know about the sensitivity of the

proposed bond towards the changes in the interest rate before making any decision for

his bond investment. The following is detailed information regarding the proposed bond

investment.

Bond RAG25:

Time left to maturity = 3 years and six months

Yield to maturity = 5 3⁄4 percent

Par value = RM1,500

Coupon = 6 percent

Using both duration and convexity, compute the estimated price, if the current market

interest rate is expected to reduce by 75-basis point.

Answer 1

Solution:

Since 3.5 years left to maturity, next coupon due is presumed to be in 6 months ( 0.5 years)

Formula: