Question

1)

A bond with a 7-year duration is worth $1,076, and its yield to maturity is 7.6%. If the yield to maturity falls to 7.48%, you would predict that the new value of the bond will be approximately

2)

Answer 1

1) Duration 7 years.

The yield to maturity falls by (7.6% - 7.48%) = 0.12%

For a 1% drop in yield to maturity, the bond increases in value by 7%.

For a 0.12% drop in yield to maturity, the bond increases in value by 0.12% * 7%/1% = 0.84%

The new value of the bond = 1,076 * (1 + 0.0084) = $1,085.0384

2) r = 7%

n = 6 years

PV = 15,000

FV = PV * (1 + r)^n

FV = 15,000 * (1 + 0.07)^6

FV = $22,510.955277735

You will get $22,511 in 6 years

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