Question

1. A bond has a face value of HK$1,000 expires in 4 years and offers a 6%p.a. annual coupon rate. The market yield (YTM) is 7%p.a.. The bond has a duration of 3.67 years. What is the bond price if the yield changes by +50 basis points?

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =4

Bond Price =∑ [(6*1000/100)/(1 + 7/100)^k]     +   1000/(1 + 7/100)^4

k=1

Bond Price = 966.13

Mod.duration prediction = -Mod. Duration*Yield_Change*Bond_Price

=-3.67*0.005*966.13

=-17.728

New bond price = bond price+Modified duration prediction

=966.13-17.728

=948.4