Question

In: Finance

1. An investor buys a three-year bond with a 5% coupon rate, paid annually, priced at...

1. An investor buys a three-year bond with a 5% coupon rate, paid annually, priced at a yield-to-

maturity of 3%. What is the Macaulay duration of the bond?

A.What is the modified duration of the bond above?

B. Assuming a 5bps change in yield-to-maturity, what is the bond’s approximate modified duration?

C. Estimate the % price change of the bond in question 1 if you expect interest rates to rise by 100bps.

Expert Solution

1]

Macaulay duration is calculated using DURATION function in Excel

Settlement = date today

Maturity = date of maturity of bond = 3 years from today

Coupon = 5%

yld = YTM = 3%

frequency = number of coupon payments per year = 1

DURATION is calculated to be 2.8635

A]

Modified duration is calculated using MDURATION function in Excel

MDURATION is calculated to be 2.78

B]

If the YTM increases by 0.05%, the modified duration is 2.7787

C]

% change in price of bond = modified duration * % change in interest rates

% change in price of bond = 2.78 * 1% = 2.78%

jeff jeffy answered 4 days ago

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