Question

A 7%, 14-year bond has a yield to maturity of 6% and duration of 7 years....

A 7%, 14-year bond has a yield to maturity of 6% and duration of 7 years. If the bond has a face value of $1000, what is the current price? If the market yield changes by 44 basis points, how much change will there be in the bond's price? What will be the estimated new price?

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Answer #1

a). To find the current price, we need to put the following values in the financial calculator:

INPUT 14 6 7%*1,000=70 1,000
TVM N I/Y PV PMT FV
OUTPUT -1,092.95

Hence, Current Price = $1,092.95

b). Change in Price = -duration x (% change in YTM) x bond's price

= -7 x +/-0.44% x $1,092.95 = -/+$33.66

c). If Yield decreases, then

New Price = Current Price + Change in price = $1,092.95 + $33.66 = $1,126.61

If Yield increases, then

New Price = Current Price - Change in price = $1,092.95 - $33.66 = $1,059.29

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