Question

A bond currently sells for $1,000, which gives it a yield to maturity of 5%. Suppose that if the yield increases by 20 basis points, the price of the bond falls to $975. What is the duration of this bond? (Do not round intermediate calculations. Round your answer to 4 decimal places.) Duration years

Answer 1

Duration of the Bond

Change in Bond Price (Δ P) = -$25 [$975 - $1,000]

Change in Yield to Maturity (ΔYTM) = +0.25% or 0.0020 [Given]

Current Selling Price of the Bond (P) = $1,000

Therefore, the Duration of the Bond = (-Δ / P) / Δ YTM

= [-(-$25 / $1,000)] / 0.0020

= [$25 / $1,000] / 0.0020

= 0.0250 / 0.0020

= 12.5000 Years (Rounded to 4 decimal place)

“Hence, the Duration of the Bond will be 12.5000 Years”