Question

An investor purchases a bond at a price of 112.41 per hundred of par. If the required yield decreases or increases by 250 basis points, the price of this bond increases to 157.01 and decreases to 85.25respectively. Using this information, solve for the approximate modified duration of the bond. Round two decimal places in your answer.

Answer 1

Modified duaration :

Modified duration is a measurable change in the value of a security in response to a change in interest rates.

Modified duration = Duration / [ 1 + YTM ]
It specifies% change in Price in opposite direction due to 1% change in Yield.

% chaneg in Price for 2.5% change in Yield = [ New Value - Old Value ] / Old Value

= [ 157.01 - 112.41 ] / 112.41

= 44.6 / 112.41

= 0.3968 I.e 39.68%

Change in Price due to 1% change in Yield = 39.68% / 2.5

= 0.1587 I.e 15.87%

Thus Modified duartion is 15.87%