Consider the following.
a. What is the duration of a two-year bond that
pays an annual coupon of 11 percent and whose current yield to
maturity is 15 percent? Use $1,000 as the face value. (Do
not round intermediate calculations. Round your answer to 3 decimal
places. (e.g., 32.161))
b. What is the expected change in the price of the
bond if interest rates are expected to increase by 0.6 percent?
(Negative amount should be indicated by a minus sign. Do
not round intermediate calculations. Round your answer to 2 decimal
places. (e.g., 32.16))
Solution :-
Therefore Duration of Bond = 1.898 Years
(ii)
Now Modified Duration = Duration / ( 1 + YTM )
= 1.8977 / ( 1 + 0.15 )
= 1.650
Here interest rates are expected to increase by 0.60 percent , So bond price will fall .
Now Change in Bond Price = - Current Bond Price * Modified Duration * Change in Interest rate
= - $934.97 * 1.65 * 0.60%
= - $9.26
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