A 5-year bond with a yield of 7% (continuously compounded) pays an 8% coupon at the end of each year. (a) What is the bond price? (b) What is the bond duration? (c) Use the duration to calculate the effecto on the bond's price of a 0.2% decrease in its yield. (d) Recalculate the bond's price on the basis of a 6.8% per annum yeild and verify that the result is in agreement with your yield.
Bond time | 5 | ||
Yield | 7.0% | ||
Coupon | 8% | ||
Face value | 100 | ||
a | Bond price | 104.10 | Using price formula in excel |
b | Bond duration | 4.33 | Using duration formula |
c | Derease in yield | 0.20% | |
Change in price | 0.0087 | % | |
New price | 105 | Since there is a decrease in yield there will be increase in price | |
d | Bond time | 5 | |
Yield | 6.8% | ||
Coupon | 8% | ||
Face value | 100 | ||
Bond price | 105 | Using price formula with Yield at 6.8% gives the same price as above |
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