Question

1) A 7%, 33-year bond has a yield-to-maturity of 10% and a modified duration of 8.32 years. If the market yield drops by 21 basis points, how much percentage change will there be in the bond’s price?

2)You can analyze the determinants of firm value using _____________________.

		momentum analysis
		technical analysis
		fundamental analysis
		none of the above

Answer 1

1) A 7%, 33-year bond has a yield-to-maturity of 10% and a modified duration of 8.32 years. If the market yield drops by 21 basis points, how much percentage change will there be in the bond’s price?

Modified duration = 8.32 years

For every 100 bps drop in the market yield, the bond's price increases by 8.32%

So, for 21 bps drop in the market yield, the bond's price increases by 8.32 * 21/100 = 0.017472

Answer: 1.7472%

2. You can analyze the determinants of firm value using fundamental analysis

Fundamental analysis involves estimating the cash flows, the growth, and the risk in evaluating the value of the firm.

Momentum and technical analysis are used to predict the price of the stock (not the value of the firm) in the short term.

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