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

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