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. (Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161))

b.	What is the expected change in the price of the bond if interest rates are expected to decline by 0.7 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

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%