A bond with a 7-year duration is worth $1,085, and its yield to maturity is 8.5%. If the yield to maturity falls to 8.29%, you would predict that the new value of the bond will be approximately _________.
Multiple Choice
$1,082.72
$1,085.00
$1,099.65
$1,087.28
Change in yield = 8.5% - 8.29% = 0.21%
Modified Duration = Duration/(1+YTM)
= 7 / (1 + 0.085)
= 6.45 years
Change in price = Change in yield x Duration
= 0.21% * 6.45
= 1.35%
New value of the bond = $1,085 * (1 + 1.35%) = $1,099.65
New value of the bond = $1,099.65
A bond with a 7-year duration is worth $1,085, and its yield to maturity is 8.5%....
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