Question

A bond currently has a price of $1,050. The yield on the bond is 6%. If the yield increases 30 basis points, the price of the bond will go down to $1,025. The duration of this bond is ____ years.\

Answer 1

Volatility of Bond: It means, change in YTM by 1% the some percentage of price change reciprocally.

Formula is = Duration / (1+YTM)

Price change Percentage              = (1050- 1025)/1050        = 0.0238 or 2.38%

The change in price due to increase in YTM by 0.30%.

For 0.30% increase in YTM – change in Price is 2.38%

For 1% increase in YTM      - Change in price is ?

= (1/0.30)*2.38

= 7.93%

Therefore, Volatility is 7.93%

Then duration   = Volatility * (1+YTN)

                                = 7.93 * (1+0.06)

                                = 8.41 years