Question

A bond with Macaulay duration of 2.1 years has a yield of 4.88% and makes coupon payments semiannually. If the yield changes to 5.51%, what percentage price change would the duration measure predict? (Round to the nearest 0.001%, drop the % symbol. E.g., if your answer is -5.342%, record it as -5.342.)

Answer 1

Macaulay Duration = 2.1 years

Modifed Duration = 2.10/(1 + 0.0488/2)

Modified Duration = 2.05 years

Change in Price = -Modified Duration(Change in YTM)

Change in Price = -2.05(0.0063)

Change in Price = -1.2915%