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A bond has a duration of 6 years. The coupon rate on the bond is 3.5%....

A bond has a duration of 6 years. The coupon rate on the bond is 3.5%. Coupons are paid semi-annually. The bond trades at a price in dollars of 1,050. If market yields decline 75 bps, what is the best estimate of the new bond price? You can ignore convexity.

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Answer #1

This question can be solved with the help of a financial calculator and following key strokes :-

Sokving for yield before yield decline

N = 6 × 2 = 12 ( semi annual coupon)

Pmt = 1.75 % × 1000 = 17.5

FV = 1000

PV = -1050

Compute I/Y = 2.5947 % (annualized)

Let the yield decline 0.75 bps,

2.5947 - 0.75 ,= 1.8447 = i/Y

Calculating new price now

FV = 1000

PMT = 17.5

N = 12

I/Y = 1.8447

Compute PV = 989.88

Approx price = 989.88

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