Question

You hold a bond with nine years until maturity, a YTM of 4%, and a duration of 7.5. The cash (one-year) rate is 2.5%.

a) In the next few minutes, you expect the market yield to go up by 5 basis points (i.e., 0.05%). What is the bond’s expected percentage price change, and your expected return, over the next few minutes?

b) Over the next year, you expect the market yield to go down by 30 basis points (i.e., 0.30%). For this period, estimate the following:

i. The bond’s expected price change

ii. Your expected return

iii. The bond’s risk premium (Note that the cash rate provided above is the risk-free rate)

Answer 1

Here firstly coupon was found by YTM and Duration

Next we checked the price when YTM increased by .05% which made a loss

Next we checked the price when YTM decreased by .30% which made a profit