Question

Coupon 9% YTM 8% Maturity 5 Years Par 1,000 Duration 3.99 years Convexity 19.76 years 1)...

Coupon 9%
YTM 8%
Maturity 5 Years
Par 1,000
Duration 3.99 years
Convexity 19.76 years

1) Calculate the price of the bond from a 10 basis point decrease in yield

2) Using duration, estimate the price of the bond for a 10 basis point decrease in yield

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Answer #1

Ans 1. Price of bond when 10 basis points decrease in yield

Annual Interest income from bond = 1000*9% = $90

Maturity is 5 years

Yield after decreasing 10basis points = 8% - .10% = 7.90%

Price of bond = Interest*(Present value annuity of 5 years @7.90%) + Matured value*[email protected]% of 5th year

Price of bond = $90*(4.003255) + $1000*(.683743) = $360.29 + $683.743 = $1044.035 approx.

Ans 2. Price of the bond using duration period

Price = Interest*(Present value annuity of 3.99 [email protected]%) + 1000*[email protected]% of 4th year

Price = 90*(3.319513) + 1000*.737758 = $298.75617 + $737.758 = $1036.514 approx

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