Question

In: Finance

1. You own a bond that matures in 5 years, has annual coupons of 8%, and...

1. You own a bond that matures in 5 years, has annual coupons of 8%, and
whose par value is $100.
a. Calculate the duration of the bond if the YTM of the bond is 5%.
b. If there has been no change in the YTM of the bond, what is the duration of the bond after the fi4st interest payment is made when 4 years remain till maturity?
c. Several days after the interest was paid, the YTM of the bond fell from 5%
to 3%. Calculate the price change in percentage by calculating the price
before and after the change, as well as using the duration calculated in
question b.

Solutions

Expert Solution

a. The duration of the bond if the YTM of the bond is 5% = 4.15
b. If there has been no change in the YTM of the bond, the duration of the bond after the first interest payment is made when 4 years remain till maturity = 3.43
c. Price before the YTM changed from 5% to 3% = $110.64

Price after  the YTM changed from 5% to 3% = $118.59

% change in price = 7.18%

% change in price using the duration = 6.86%

Price of the bond at YTM of 3% implied by duration = $118.22

Workings:

jeff jeffy answered 2 years ago
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