A bond is selling for $92.2783 per hundred of par. An analyst determines that the bond's...

A bond is selling for $92.2783 per hundred of par. An analyst determines that the bond's modified duration is 7.9615. Using this information, what is your best estimate of the bond's price if market yields decrease by 50 basis points?

Please show work

Expert Solution

Modified Duration is 7.9615

Modified duration shows that if there is 1% increase in Yield, Price of bond will drop by 7.9615% & vice versa .

so , if yield decreases by 50 basis points or 0.5% , then there be an increase of (7.9615*0.5)% in bond price.

so, price will increase by 3.98075%

current price = 92.2783

increase in price = 92.2783*3.98075% = 3.6734

new price = 92.2783+3.6734= 95.9517

jeff jeffy answered 2 years ago

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