You own a bond that has a duration of 6 years. Interest rates are currently 7%,...
You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you believe the Fed is about to increase interest rates by 22 basis points. Your predicted price change on this bond is ________.
Homework Answers
Solution:
D* = Given duration /(1+Interest rate) = 6 / (1+7%)
D* = 6/1.07
D* = 5.607476636
----
Now,
Percentage change in price = -D* x Change in yield
Percentage change in price = -5.607476636 x 0.22%
Percentage change in price = -1.2336%
Percentage change in price = -1.23%
Answer in two decimals: -1.23%
------
Hence,
You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you believe the Fed is about to increase interest rates by 22 basis points. Your predicted price change on this bond is -1.23%
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