Question

Consider the following. |

a. |
What is the duration of a two-year bond that pays an annual
coupon of 10 percent and whose current yield to maturity is 14
percent? Use $1,000 as the face value. |

b. |
What is the expected change in the price of the bond if interest
rates are expected to decline by 0.7 percent? |

Answer #1

Answer (a) **Duration = 1.91**

**(b) Expected change in price = 1.176 or
1.18%**

**Calculation :-**

(a) Duration

Year | Cashflow | PVF@14% | Discounted Cashflow | Weight | Weightt * year |

1 | $ 100.00 | 0.8772 | $ 87.72 | 0.0939 | 0.09 |

2 | $ 1,100.00 | 0.7695 | $ 846.41 | 0.9061 | 1.81 |

Duration |
1.91 |

(b) Modified Duration =

= Duration / (1+YTM)

= 1.91 / (1+0.14)

= 1.91 / 1.14

= 1.68%

Expected Change in Price = Modified duration * YTM change

= 1.68% * 0.7

**= 1.176%**

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