Question

The effective duration for a 7-year bond is 6.8. The bond has the following characteristics: Current price of $660, A price of $639 when the yield curve shifts up, A price of $684 when the yield curve shifts down. By how many basis points did we shock the yields?

Answer 1

We can calculate the change in the yield as follows:

Duration (nper) = 6.8 year

Payment (pmt) = 0 as we have no details about it so it is considered to be zero

Current Value (pv) = $ 660

Future Value (fv) = $ 1000 as we have no details so we will consider the par va;ue of bond as 1,000

Using the Rate function in excel sheet as follows:

=RATE(nper,pmt,-pv,fv)

=RATE(6.8,0,-660,1000)

Yield comes out to be 6.30%

Now as the Current Value = $ 639, and rest everything remaining constant the yield comes out to be

=RATE(6.8,0,-639,1000)

= 6.81%

Increase in yield rate = New rate - Old Rate

= 6.81% - 6.30%

= 0.51% or 51 Basis points increase

If the Current Value = $ 684, and rest everything remaining constant the yield comes out to be

=RATE(6.8,0,-684,1000)

= 5.74%

Decrease in yield rate = New rate - Old Rate

= 6.30% - 5.74%

= 0.56% or 56 Basis points decrease