Impact of Duration and Convexity on Bond Price

Consider a 10-year bond with a face value of $1,000, a coupon rate of 6%, and annual coupon payments. The bond's yield to maturity (YTM) is currently 5%. The bond has a duration of 8 years and a convexity of 75. You are evaluating the impact of a change in interest rates on the bond's price.

If the interest rates increase by 1%, what will be the expected change in the price of the bond based on the duration and convexity? Use the approximate price change formula:

ΔP ≈ -Duration x ΔY + 0.5 x Convexity x (ΔY)^2

where ΔP is the change in price, ΔY is the change in yield (expressed in decimal), duration is in years, and convexity is a measure of the curvature of the price-yield relationship.