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4. A government bond currently carries a YTM of 9% and a market price of $101.79....

4. A government bond currently carries a YTM of 9% and a market price of $101.79. If the bond pays semi-annual coupon of 10% for 2 years, a. What is its duration? b. What would be new price if the interest rates decrease from 9% to 8%?

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Answer #1

1. Calculation of duration of bond :

Given:

Coupon Rate = 10% i.e, 5% semi-annual

Duration = 2years i.e, 4 payments

YTM = 9% i.e, 4.5% semi-annual

Duration of the bond = 1year

2. New price of the bond when YTM decreses to 8% from 9% :

New price of the bond = 103.63

NOTE:

1. Face Value of the bond is assumed at $100

2. It is assumed that bonds will be redeemed at $100.

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