Question

A four-year bonds price is $107.54 and its duration is 3.78. How much you expect the...

A four-year bonds price is $107.54 and its duration is 3.78. How much you expect the bond price to move when there is a 0.14% decrease in its yield. (Use duration; and enter negative values with negative sign, positive values without any sign in two decimals, and do not use $ sign. I.e., for $0.5789 enter 0.58; for - $0.5789 enter -0.58 )

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Answer #1

The percentage change in the price of the bond is computed by multiplying the change in yield by the negative value of the modified duration.

In the given case, Percentage change in Bond price = Change in Yield * (- Duration)

Percentage change in Bond price = -0.14 * (-3.78)

Percentage change in Bond price = 0.5292%

Thus Bond price will increase by 0.5292% if yield decreases by 0.4%

Movement in bond price = Current Price * Percentage change in bond price

Movement in bond price = $107.54 * 0.5292% = $0.5691

Thus, Bond Price will increase by $0.5691

New Bond Price = Current price + Increase in Price

New Bond Price = $107.54 + $0.5691 = $108.1091

Incase of any doubt, please comment below. I would be happy to help.

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