Question

Calculate the duration of a two-year, $1,000 bond that pays an annual coupon of 10 percent and trades at a yield of 14 percent. What is the expected change in the price of the bond if interest rates decline by 0.50 percent? (2 points)? (show all the work!)

Answer 1

Given,

Par value = $1000

Coupon rate = 10%

Yeild Rate = 14%

Maturity = 2 years

Time	CF	PV of CF (CF*(100/r)^n)	PV of CF * Time
1	100	87.72	87.72
2	1100	846.41	1692.83
	Total	934.13	1780.55

Duration , D= 1780.55/934.13

=1.9061

If interest rate decline by 0.50 %

expected change in price=

=

=$ 7.81

The expected change the price when interest rate decline by 0.50% is $7.81

And the new price =$934.13+$7.81

=$941.94