Sarah just used $96.23 purchased a Treasury bond. Assume that the yield rate for this bond...

Sarah just used $96.23 purchased a Treasury bond. Assume that the yield rate for this bond is j2 =3.34% p.a. and the duration of this bond is 2.66 years. Without actually calculating the new price for this bond, use the bond price and the duration value to estimate (use the price sensitivity formula) the change in price of this bond that would result from an increase in yield rate (j2) of 16 basis points. Round your answer to four decimal places.

Select one: a. -0.1982 b. -0.3963 c. -0.4028 d. -0.2014

Expert Solution

Answer :

Here, we can calculate,

Modified Duration (D) = Macaulay Duration / [ 1 + ( YTM / number of periods ) ]

= 2.66 / [ 1 + ( 3.34% / 2 ) ]

= 2.6163

Now,

Change in Bond Price = ( - D * Change in yield ) * Current price

= ( - 2.6163 * 0.16% ) * $96.23

Change in Bond Price = - 0.4028

The answer is option (c) i.e., - 0.4028

jeff jeffy answered 2 years ago

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