Question

An investor purchases a bond at a price of 112.41 per hundred of par. If the required yield decreases or increases by 100 basis points, the price of the bond increases to 127.53 and decreases to 100 respectively. Using this information, solve for the approximate modified duration of the bond. Round two decimal places in your answer.

Please show work

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 YTM.

In the givencase, for 1 % ( 100 basis Points) change inYield leads to 13.45% change in Price.

%changei Price = [ New Value- Old Value ] / Old Value

= [ 127.53 - 112.41 ] / 112.41

= 15.12 / 112.41

= 0.1345 I.e 13.45%

Modified duration is 13.45%