Question

(8) calculate the price change for a 1-percent decrease in market yield for the following bond: par = $1000; coupon rate = 6 percent, paid semi-annually; market yield = 6 percent; term to maturity = 10 years

Answer 1

DUration of a bond : The period in which investment is recovered.

DUration in Years = Duration in Periods / 2

= 15.32/2

= 7.66 Years

Modified Duration = Duration / (1 +YTM)

= 7.66 / (1+0.06)

= 7.66 / 1.06

= 7.23

i.e 1% change in YTM leads to 7.23% change in Price

There is invert relation between YTM & Price

if YTM decreases by 1%, Price will be increased by 7.23%

Price if YTM 5%( Reduced by 1% i.e 6% -1%) = $ 1000 * 1.0723

= $ 1072.30